KCS ENERGY INC, 10-Q, 1995-02-13

KCS ENERGY INC
10-Q, 1995-02-13
PETROLEUM & PETROLEUM PRODUCTS (NO BULK STATIONS)

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<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 December 31, 1994
-----------------
OR

- - - - ----- TRANSITION REPORT PURSUANT TO SECTION 3 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: 11,459,096 shares outstanding as of
January 31, 1995.

<PAGE> 2
KCS ENERGY, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED INCOME

<TABLE>
<CAPTION>
Three Months Ended
December 31,

(Thousands of Dollars) Unaudited 1994 1993
-------------------------------- ---- ----
<S> <C> <C>
Revenue $91,306 $85,191
--------------------------------------------------------------------------------------------------------
Operating costs and expenses
Cost of gas sales 66,503 68,483
Other operating and administrative 5,223 4,033
Depreciation, depletion
and amortization 7,559 2,973
--------------------------------------------------------------------------------------------------------
Total operating costs
and expenses 79,285 75,489
--------------------------------------------------------------------------------------------------------
Operating income 12,021 9,702

Interest and other income, net 108 126
Interest expense (1,124) (545)
--------------------------------------------------------------------------------------------------------
Income before income taxes 11,005 9,283
Federal and state income taxes 3,910 3,064
--------------------------------------------------------------------------------------------------------
Net income $7,095 $6,219
========================================================================================================

Earnings per share of common
stock and common stock
equivalents $0.60 $0.53
========================================================================================================

Average shares of common stock
and common stock equivalents
outstanding 11,739,454 11,832,776
========================================================================================================

Cash dividends per share $0.03 $0.02
========================================================================================================
</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>
December 31, September 30,
(Thousands of Dollars) Unaudited 1994 1994
- - - - -------------------------------- ---- ----
<S> <C> <C>
Assets
------
Current assets
Cash and cash equivalents $988 $5,075
Trade accounts receivable, net 59,949 35,632
Fuel inventories 2,509 2,327
Federal income taxes receivable 284 840
Other current assets 3,864 3,856
---------------------------------------------------------------------------------------------
Current assets 67,594 47,730
---------------------------------------------------------------------------------------------
Oil and gas properties, full cost
method, net 125,621 112,470
Natural gas transportation systems, net 17,315 17,379
Other property, plant and equipment, net 1,468 1,483
---------------------------------------------------------------------------------------------
Property, plant and equipment, net 144,404 131,332
---------------------------------------------------------------------------------------------
Investments and other assets 2,425 2,354
---------------------------------------------------------------------------------------------
$214,423 $181,416
=============================================================================================

Liabilities and stockholders' equity
------------------------------------
Current liabilities
Note payable and current
maturities of long-term debt $1,035 $1,722
Accounts payable 44,172 34,419
Accrued liabilities 6,172 5,990
---------------------------------------------------------------------------------------------
Current liabilities 51,379 42,131
---------------------------------------------------------------------------------------------
Deferred credits and other liabilities 20,406 16,948
---------------------------------------------------------------------------------------------
Long-term debt 61,970 48,571
---------------------------------------------------------------------------------------------
Stockholders' equity
Common stock, par value $0.01 per
share - authorized 50,000,000
shares, issued 12,344,278 and
12,324,116, respectively 123 123
Additional paid-in capital 23,895 23,745
Retained earnings 59,885 53,133
Less treasury stock, 890,248 shares at cost (3,235) (3,235)
---------------------------------------------------------------------------------------------
Total stockholders' equity 80,668 73,766
---------------------------------------------------------------------------------------------
$214,423 $181,416
=============================================================================================
</TABLE>

The accompanying notes to condensed financial statements are an integral part
of these statements.

<PAGE> 4

KCS ENERGY, INC. AND SUBSIDIARIES
CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS

<TABLE>
<CAPTION>
Three Months Ended
December 31,
(Thousands of Dollars) Unaudited 1994 1993
-------------------------------- ---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 7,095 $ 6,219

Non-cash charges (credits):
Depreciation, depletion and amortization 7,559 2,973
Other non-cash charges and credits, net 2,816 435
------------------------------------------------------------------------------------------------------
17,470 9,627
Net changes in assets and liabilities:
Trade accounts receivable (24,317) (11,098)
Accounts payable and accrued liabilities 9,935 32

Fuel inventories (182) 301
Other, net 1,117 2
------------------------------------------------------------------------------------------------------
Net cash provided in (used in) operating activities 4,023 (1,136)
------------------------------------------------------------------------------------------------------

Cash flows from investing activities:
Investment in oil and gas properties (20,390) (11,188)
Other capital expenditures (250) (562)
------------------------------------------------------------------------------------------------------
Net cash used in investing activities (20,640) (11,750)
------------------------------------------------------------------------------------------------------

Cash flows from financing activities:
Proceeds from debt 13,431 5,400
Repayments of debt (719) (611)
Tax benefit on stock option exercises 76 1,018
Dividends paid (229) (227)
Other, net (29) 1,327
------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 12,530 6,907
------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (4,087) (5,979)
Cash and cash equivalents at beginning of period 5,075 11,348
------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 988 $ 5,369
======================================================================================================
</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 $763,000 and $502,000 for the three months ended
December 31, 1994 and December 31, 1993, respectively. No income tax payments
were made during the three months ended December 31, 1994, compared with
payments of $1,667,000 for the three months ended December 31, 1993.

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. Revenues and operating income by business segment were as
follows:

<TABLE>
<CAPTION>
Three Months Ended
December 31,
(Thousands of Dollars) Unaudited 1994 1993
-------------------------------- ---- ----
<S> <C> <C>
Revenue
-------
Oil and Gas Exploration
and Production $22,947 $14,166
Energy Marketing and Services 65,137 67,537
Natural Gas Transportation 5,086 4,254
Intercompany Sales (1,864) (766)
------------------------------------------------------------------------------------------------------
$91,306 $85,191
======================================================================================================

Operating Income
----------------
Oil and Gas Exploration
and Production $12,471 $9,489
Energy Marketing and Services 14 599
Natural Gas Transportation 271 395
------------------------------------------------------------------------------------------------------
Total Business Segments 12,756 10,483
Corporate Expenses (735) (781)
------------------------------------------------------------------------------------------------------
12,021 9,702
Interest and Other Income, net 108 126
Interest Expense (1,124) (545)
------------------------------------------------------------------------------------------------------
Income Before Income Taxes $11,005 $ 9,283
======================================================================================================
</TABLE>

5
<PAGE> 6
KCS ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

3. A KCS subsidiary, KCS Resources, Inc. ("KCS"), is currently
selling gas from certain leases in south Texas under a contract with
Tennessee Gas Pipeline Company ("Tennessee Gas"). KCS has asserted
that the contract, which expires in January 1999, provides that the
gas price is to be calculated in accordance with Section 102(b)(2) of
the Natural Gas Policy Act of 1978 ("NGPA"), plus reimbursement of
severance taxes. In addition, it provides that Tennessee Gas shall
take or pay for 85% of the delivery capacity of wells covered by the
contract.
Tennessee Gas filed suit in August 1990, in the 57th District
Court of Bexar County, Texas, against KCS and its co-sellers under the
contract contending, among other things, that a portion of the leases
were no longer subject to the contract and that for the balance of the
leases, the price was to be based on Section 101 of the NGPA which,
while less than the price calculated under Section 102(b)(2), is still
considerably above current spot market prices.
In July, 1992, the Texas District Court upheld the contract
and also awarded KCS approximately $760,000 for legal fees and past
underpayments. In August 1993, the Court of Appeals affirmed the
lower court's decision that all the leases were subject to the
contract, that the price payable by Tennessee Gas should be determined
in accordance with Section 102(b)(2) of the NGPA and that KCS had the
right to pool the leases, the production from which would be covered
by the contract on a pro rata acreage basis.
The Court of Appeals also ruled that the lower court erred in
granting summary judgment that the contract was not an output contract
governed by the Texas Uniform Commercial Code ("Code"). Specifically,
the Court of Appeals ruled that the contract was subject to Section
2.306 of the Code, that new wells could be drilled and production
increased, but that right of the sellers to increase production is
subject to the good faith and reasonableness provisions of the Code,
an issue remanded to the lower court for trial. The Court of Appeals
also set aside the lower court's awards to KCS of legal fees and past
underpayments, pending the outcome of the trial on the output issue.
In June 1994, the Supreme Court of Texas agreed to hear and
decide the output issue raised by KCS in its application for a writ of
error. The Supreme Court of Texas also agreed to hear and decide
certain of the issues which Tennessee Gas raised in its application
for a writ of error involving rulings of the Court of Appeals which
had been decided in favor of KCS. Oral argument before the Texas
Supreme Court was heard on December 13, 1994. The Company is
currently awaiting the decision of the Court.
While KCS believes its position to be strong, and that it has
acted prudently, in good faith and in a reasonable manner under the
contract and should therefore prevail, there can be no assurance as
to the ultimate outcome of this matter. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" of this
Form 10-Q for further information regarding the Tennessee Gas
contract.

6
<PAGE> 7
KCS ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations - Consolidated

Net income for the three months ended December 31, 1994 was
$7,095,000, or $0.60 per share, compared to $6,219,000, or $0.53 per share, for
the same period a year ago. The earnings improvement in the current year period
was due to increased oil and gas production including higher sales of natural
gas from the Company's acreage in the Bob West Field dedicated under the
above-market price Tennessee Gas contract. The impact of the higher contract
revenue and increased non-contract production was partially offset by warmer
than normal weather conditions and significantly lower energy prices which had
a negative impact on the Company's non-contract production as well as on the
operations of the Natural Gas Transportation and the Energy Marketing and
Services segments. (See Note 7 to Consolidated Financial Statements in the
Company's 1994 Annual Report to Stockholders and Note 3 to Condensed
Consolidated Financial Statements of this Form 10-Q for information regarding
the Tennessee Gas contract).

Results of Operations -Business Segments
Segment information reflects volumes, revenues and expenses associated
with transactions involving affiliates which are eliminated in consolidation.

Oil and Gas Exploration and Production
<TABLE>
<CAPTION>
Three Months Ended
December 31,
(Thousands of Dollars) Unaudited 1994 1993
- - - - -------------------------------- ---- ----
<S> <C> <C>
Revenue $22,947 $14,166
Production costs 2,031 1,486
Depreciation, depletion
and amortization 7,260 2,699
Other operating expenses 1,185 492
------------------------------------------------------------------------------------------------------
Operating income $12,471 $9,489
======================================================================================================

Oil production (Mbbl) 56 45
Natural gas production (MMcf):
Tennessee Gas contract 1,916 1,642
Non-contract 1,528 668
----- ---
Total gas production 3,444 2,310
======================================================================================================
Average sales price (a):
Oil (per bbl) $15.66 $15.59
Gas (per Mcf) (b) 5.21 5.77

DD&A as a percent of revenue 31.5% 19.0%
======================================================================================================
</TABLE>

(a) Includes hedging gains and losses and excludes the effect of the
volumetric production payment program.
(b) Excludes severance tax reimbursements and the effect of gas pricing and
balancing determinations with other interest owners.

7
<PAGE> 8
KCS ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)

Revenue increased from higher overall oil and gas sales and
production, including more volume covered under the Tennessee Gas contract,
offset somewhat by lower average prices on non-contract gas. Non-contract gas
production increased 129% to 1.5 Bcf and represented 44% of total gas
production (as compared to 29% last year), reflecting the success of the
Company's balanced program of exploration and development drilling and property
acquisitions. The impact of the increase in non-contract production was
partially offset by a 28% reduction in the average sale price of non-contract
natural gas during the current year period as compared to the same period a
year ago. The lower non-contract gas prices were largely the result of warmer
than normal weather conditions and the resultant excess natural gas storage
supply and reflect overall market conditions in North America. Average sales
prices under the Tennessee Gas contract, excluding severance tax
reimbursements, were $7.68 during the current year three-month period compared
to $7.20 during the same period last year.
The increase in production costs and other operating expenses was
mainly attributable to the increase in production volume. Depreciation,
depletion and amortization increased due to the higher gas production along
with an increase in the DD&A rate. The DD&A rate reflects, among other things,
current lower gas prices which reduce calculated future gross revenue.

Natural Gas Transportation
<TABLE>
<CAPTION>
Three Months Ended
December 31,
(Thousands of Dollars) Unaudited 1994 1993
-------------------------------- ---- ----
<S> <C> <C>
Revenue $5,086 $4,254
Cost of gas sales 4,185 3,343
----------------------------------------------------------------------------------------------------
Gross Margin 901 911
Depreciation 219 214
Other operating expenses 411 302
----------------------------------------------------------------------------------------------------
Operating income $ 271 $ 395
====================================================================================================

Volume (MMcf) 5,627 6,078

Gross Margin per Mcf $0.160 $0.150
====================================================================================================
</TABLE>

Gross margin was slightly lower in the current year three-month period
as lower volumes of sales and transportation offset the increase in average
margin per Mcf. The lower volume was largely attributable to mild weather in
Texas during this quarter. The prior year period included higher sales to
certain high-priority, weather-sensitive customers which resulted from colder
than normal weather conditions. The Company maintained per unit margins mainly
due to higher volumes under long-term transportation and gathering agreements
currently in place. The increase in other operating expenses was primarily the
result of increased costs associated with expansion of the Company's gathering
systems.

8
<PAGE> 9
KCS ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)

Energy Marketing and Services
<TABLE>
<CAPTION>
Three Months Ended
December 31,
(Thousands of Dollars) Unaudited 1994 1993
- - - - -------------------------------- ---- ----
<S> <C> <C>
Revenue $65,137 $67,537
Cost of gas sales 63,944 65,636
---------------------------------------------------------------------------------------------------
Gross Margin 1,193 1,901
Other operating expenses 1,179 1,302
---------------------------------------------------------------------------------------------------
Operating income $ 14 $ 599
===================================================================================================

Volume (MMcf) 42,125 36,058

Gross Margin per Mcf $0.028 $0.053
===================================================================================================
</TABLE>

The decline in revenue for the three months ended December 31, 1994
compared to the same period in the prior year was due to lower natural gas
prices which more than offset the effect of the 17 percent increase in volume.
The warmer weather experienced in most of the Company's markets, low gas prices
and relatively little price volatility, coupled with a major cogeneration plant
serviced by the company being under repair and out of service for the current
year three-month period, were the primary reasons for the significant decreases
in gross margin per Mcf and operating income. Lower consulting and other
professional fees contributed to the reduction in other operating expenses.

Interest Expense

The current year increase in interest expense was due almost equally
from higher average outstanding borrowings under the Company's credit
facilities and increased average interest rates. The Company incurred the
additional borrowings to finance a portion of its capital spending program.
(See "Liquidity and Capital Resources" for further information).

9
<PAGE> 10
KCS ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)

Liquidity and Capital Resources

Operating cash flow (net income adjusted for non-cash charges) was
$17.5 million for the three months ended December 31, 1994 compared to $9.6
million for the same period a year ago. This increase was largely due to the
continued expansion of the Company's oil and gas exploration and production
business.

Working Capital
Working capital increased to $16.2 million at December 31, 1994 from
$5.6 million at September 30, 1994 due mainly to an increase in the accounts
receivable arising from oil and gas operations. In October 1994 KCS, its
co-sellers under the Tennessee Gas contract and Tennessee Gas entered into an
agreement whereby Tennessee Gas agreed to take no less than 85% of the delivery
capacity, if available, from the wells covered by the contract on a monthly
basis, and to pay $3.00 (non-refundable) per MMBtu, for all gas taken under the
contract from September 17, 1994, until the earlier of August 1, 1995 or such
time as the Supreme Court of Texas rules on the applications for writ of error
filed by KCS, its co-sellers and Tennessee Gas (See Note 7 to Consolidated
Financial Statements in the Company's 1994 Annual Report to Stockholders and
Note 3 to Condensed Consolidated Financial Statements of this Form 10-Q.)
Tennessee Gas also posted a $120 million supersedeas bond to secure its
obligation to pay the differential between the contract price ($7.68 per MMBtu
for sales of gas production during the three months ended December 31, 1994)
and the $3.00 per MMBtu, in the event of a decision favorable to KCS and its
co-sellers. That differential is included in accounts receivable. Working
Capital was also affected by the timing of cash receipts and cash payments
inherent in the high volume activity of the Company's energy marketing and
services business.

Capital Expenditures
Capital expenditures for the three month ended December 31, 1994 were
$20.6 million, of which $20.4 million were invested in oil and gas operations,
including $9.9 million attributable to the purchase of gas reserves under the
Company's volumetric production payment program. The other $10.5 million
invested during the quarter in oil and gas operations was largely to conduct
exploratory and development drilling on the Company's existing properties. The
Company funded its capital expenditures for the quarter with a mix of
internally generated cash and additional borrowings under its credit
facilities.

Credit Facilities
In January 1995 the Company's natural gas marketing subsidiary
replaced its existing working capital facility with two new revolving credit
facilities designed to support the expansion of its gas marketing operations
and its volumetric production payment program. The first new facility is a $25
million revolving bank credit facility which matures in February 1998 and is
secured by the oil and gas reserves purchased through certain volumetric
production payments. Under the terms of this facility, the subsidiary's
borrowing limit is a function of a

10
<PAGE> 11
KCS ENERGY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)

borrowing base which may be adjusted by the lender's valuation of the pledged
assets. The initial borrowing base was set at $10 million and will be reviewed
at least semi-annually. The facility permits the borrower to choose between
interest rate options based on the bank's prime rate, its certificate of
deposit rate or LIBOR. A commitment fee is paid on the unused portion of the
borrowing base. At closing of the facility in January 1995, the $7.0 million
initial borrowing was used to fund purchases of gas reserves under the
Company's volumetric production payment acquisition program.
The Company's natural gas marketing subsidiary entered into a second
new $25 million revolving credit facility with another bank which matures in
August 1996 and is secured by its accounts receivable and other assets
(excluding those pledged under the volumetric payment facility above). Under
the terms of this agreement the subsidiary may borrow the lesser of the $25
million credit commitment or a percentage of eligible accounts receivable, as
defined in the agreement. The initial borrowing base was $20.8 million and
will be reviewed monthly. The Company has the option to choose the interest
rate to be charged by the bank on each advance based either on its prime rate
or on one-month LIBOR. A commitment fee is paid on the unused portion of the
credit commitment. The subsidiary's initial $20.8 million borrowing under the
facility on January 11, 1995, was used to repay the $19.5 outstanding on the
prior working capital facility and for other working capital purposes.
Subsequent to December 31, 1994, the borrowing base, or actual
availability, of the Company's Master Note Facility with a bank was increased
from $64 million to $75 million. This Master Note Facility is secured by
substantially all of the assets of the Company's oil and gas and pipeline
subsidiaries. At December 31, 1994, the Company had utilized $54.5 million of
the availability under the facility, $46.4 million as cash advances and $9.1
million for the issuance of a letter of credit in favor of the operator of the
Bob West Field as a condition to the release of funds previously held.

Tennessee Gas Litigation
At December 31, 1994, the Company had recorded cumulative revenue of
$90.8 million for newly discovered gas sold under the Tennessee Gas contract,
of which approximately 73% is attributable to the contract's contested
above-market pricing provisions. While the Company has been successful to date
in defending the contract and expects ultimately to prevail, an adverse outcome
to the litigation could require the Company to reverse some or all of this
incremental revenue and repay Tennessee Gas. In addition, the borrowing base
of the Master Note Facility could be reduced, since it is based in part on an
evaluation of the gas reserves on the acreage covered by the Tennessee Gas
contract.
Even in the event of an adverse outcome in the litigation, the Company
believes it has sufficient cash resources to support its business and growth
strategies, albeit at a somewhat slower rate of growth.

Equity Availability
KCS has 5 million authorized but unissued shares of preferred stock
and over 38.5 million shares of common stock available for future equity
financing.

11
<PAGE> 12
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 10.1 - Credit Agreement dated January 12, 1995
between KCS Energy Marketing, Inc. and Comerica Bank -
Texas.

Exhibit 10.2 - Guaranty Agreement dated January 12, 1995
by KCS Energy, Inc. and Proliq, Inc. in favor of Comerica
Bank - Texas.

Exhibit 10.3 - Loan Agreement dated January 11, 1995
among KCS Energy Marketing, Inc., as Borrower, KCS
Energy, Inc. and Proliq, Inc., each as a guarantor, and
Canadian Imperial Bank of Commerce, as Lender.

Exhibit 10.4 - Security Agreement dated January 11, 1995
among KCS Energy Marketing, Inc., KCS Energy, Inc., and
Canadian Imperial Bank of Commerce.

Exhibit 10.5 - Pledge and Security Agreement dated
January 11, 1995 between Proliq, Inc. and Canadian
Imperial Bank of Commerce.

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 for the three months ended December 31, 1994.

12
<PAGE> 13

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.

February 10, 1995 /S/ HENRY A. JURAND
- - - - ----------------- -------------------
Henry A Jurand
Vice President, Treasurer
and Secretary
(Principal Financial Officer)

13
<PAGE> 14
EXHIBIT INDEX

Exhibit 10.1 - Credit Agreement dated January 12, 1995
between KCS Energy Marketing, Inc. and Comerica Bank -
Texas.

Exhibit 10.2 - Guaranty Agreement dated January 12, 1995
by KCS Energy, Inc. and Proliq, Inc. in favor of Comerica
Bank - Texas.

Exhibit 10.4 - Security Agreement dated January 11, 1995
among KCS Energy Marketing, Inc., KCS Energy, Inc., and
Canadian Imperial Bank of Commerce.

Exhibit 10.5 - Pledge and Security Agreement dated
January 11, 1995 between Proliq, Inc. and Canadian
Imperial Bank of Commerce.

Exhibit 11 - Statement re computation of per share
earnings.

Exhibit 27 - Financial Data Schedule.

<PAGE> 1

Exhibit 10.1

CREDIT AGREEMENT

BETWEEN

KCS ENERGY MARKETING, INC.,

AND

COMERICA BANK-TEXAS

January 12, 1995
<PAGE> 2
TABLE OF CONTENTS

ARTICLE I Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Section 1.2 Use, and Construction of Defined Terms; References and Headings . . . . . . 16
Section 1.3 Accounting Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

ARTICLE II Credit Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 2.1 Commitment for Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 2.2 Credit Note . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Section 2.3 Requests for Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Section 2.4 Conversions and Continuations . . . . . . . . . . . . . . . . . . . . . . . . 18
Section 2.5 Use of Proceeds of Advances . . . . . . . . . . . . . . . . . . . . . . . . . 19
Section 2.6 Credit Borrowing Base; Credit Borrowing Base Reductions;
Mandatory Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

ARTICLE III Additional Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Section 3.1 Commitment Fee: Reduction or Termination of Credit Commitment . . . . . . . . 21
Section 3.2 Facility Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Section 3.3 Engineering Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

ARTICLE IV Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Section 4.1 Method of Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Section 4.2 Prepayment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Section 4.3 General Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Section 4.4 Computation of Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

ARTICLE V Yield Protection and Illegality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Section 5.1 Additional Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Section 5.2 Limitation on Types of Advances . . . . . . . . . . . . . . . . . . . . . . . 25
Section 5.3 Illegality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Section 5.4 Substitute Prime Rate Advances . . . . . . . . . . . . . . . . . . . . . . . 26
Section 5.5 Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Section 5.6 Additional Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

ARTICLE VI Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Section 6.1 Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Section 6.2 Setoff . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Section 6.3 Guaranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

ARTICLE VII Conditions Precedent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Section 7.1 Initial Advance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Section 7.2 All Advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
</TABLE>

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ARTICLE VIII Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Section 8.1 Corporate Existence and Authority . . . . . . . . . . . . . . . . . . . . . 31
Section 8.2 Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Section 8.3 Enforceability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Section 8.4 No Breach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Section 8.5 Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Section 8.6 Litigation and Judgments . . . . . . . . . . . . . . . . . . . . . . . . . 32
Section 8.7 Rights in Properties; Liens . . . . . . . . . . . . . . . . . . . . . . . . 32
Section 8.8 Compliance with Law: Restrictions . . . . . . . . . . . . . . . . . . . . . 33
Section 8.9 Investment Company Act . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Section 8.10 Public Utility Holding Company Act . . . . . . . . . . . . . . . . . . . . 34
Section 8.11 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Section 8.12 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Section 8.13 Debt Note Payable Schedule . . . . . . . . . . . . . . . . . . . . . . . . 34
Section 8.14 Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Section 8.15 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Section 8.16 Place of Business; Names; Debit Authorizations . . . . . . . . . . . . . . 35
Section 8.17 Use of Proceeds: Margin Securities . . . . . . . . . . . . . . . . . . . . 35
Section 8.18 Concentration Account; Certain Balances . . . . . . . . . . . . . . . . . . 35
Section 8.19 Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Section 8.20 Make-up Obligations: Gas Imbalances . . . . . . . . . . . . . . . . . . . . 37
Section 8.21 Payments by Purchasers of Production . . . . . . . . . . . . . . . . . . . 37
Section 8.22 Claims in Respect of Mortgaged Properties . . . . . . . . . . . . . . . . . 37
Section 8.23 Federal, State and Indian Leases . . . . . . . . . . . . . . . . . . . . . 37
Section 8.24 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Section 8.25 Fair Consideration. No Additional Extensions of Credit . . . . . . . . . . 38
Section 8.26 Location of Entity of Borrower . . . . . . . . . . . . . . . . . . . . . . 39

ARTICLE IX Positive Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Section 9.1 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Section 9.2 Certificates; Other Information . . . . . . . . . . . . . . . . . . . . . . 39
Section 9.3 Performance of Obligations . . . . . . . . . . . . . . . . . . . . . . . . 41
Section 9.4 Preservation of Existence and Conduct of Business . . . . . . . . . . . . . 41
Section 9.5 Payment of Taxes and Claims . . . . . . . . . . . . . . . . . . . . . . . . 41
Section 9.6 Inspection Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Section 9.7 Keeping Books and Records . . . . . . . . . . . . . . . . . . . . . . . . . 41
Section 9.8 Compliance with Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Section 9.9 Compliance with Agreements; Trade Debt . . . . . . . . . . . . . . . . . . 42
Section 9.10 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Section 9.11 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Section 9.12 Use of Proceeds; Compliance with Regulations G, T, U, and X . . . . . . . 42
Section 9.13 Engineering Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
</TABLE>

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ARTICLE X Negative Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Section 10.1 Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Section 10.2 Limitation of Lien . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Section 10.3 Negative Pledge Amount . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Section 10.4 Mergers and Dissolutions: Change in Business Structure . . . . . . . . . . 45
Section 10.5 Restricted Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Section 10.6 Loans, Advances and Investments . . . . . . . . . . . . . . . . . . . . . . 46
Section 10.7 Transactions with Affiliates . . . . . . . . . . . . . . . . . . . . . . . 47
Section 10.8 Disposition of Assets: Sale Leaseback . . . . . . . . . . . . . . . . . . . 47
Section 10.9 Prepayment of Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Section 10.10 Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Section 10.11 Sale or Discount of Receivables . . . . . . . . . . . . . . . . . . . . . . 47
Section 10.12 Concentration Account . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Section 10.13 Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

ARTICLE XI Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Section 11.1 Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Section 11.2 Remedies Upon Default . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Section 11.3 Certain Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Section 11.4 Limited Remedy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Section 11.5 Notice of Actions Taken . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Section 11.6 Proceeds of Production from the Mortgaged Properties; Letter
Transfer Orders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

ARTICLE XII Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Section 12.1 Expenses of Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Section 12.2 INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Section 12.3 Restatement; Exhibits and Schedules; Reliance on Documents . . . . . . . . 57
Section 12.4 No Waiver: Cumulative Remedies . . . . . . . . . . . . . . . . . . . . . . 58
Section 12.5 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Section 12.6 Survival of Representations and Warranties . . . . . . . . . . . . . . . . 58
Section 12.7 Entire Agreement: Amendment . . . . . . . . . . . . . . . . . . . . . . . . 59
Section 12.8 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Section 12.9 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Section 12.10 Applicable Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Section 12.11 Submission to Jurisdiction; Waivers . . . . . . . . . . . . . . . . . . . . 61
Section 12.12 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Section 12.13 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Section 12.14 Participations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Section 12.15 Governmental Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Section 12.16 Conflicting Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . .63
Section 12.17 Strict Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Section 12.18 No Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
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Section 12.19 Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Section 12.20 Bank as Sole Beneficiary . . . . . . . . . . . . . . . . . . . . . . . . . 65
Section 12.21 Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Section 12.22 Entire Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
</TABLE>

SCHEDULES

Schedule 1 - Mortgaged Properties (Section 1.1, 6.1)
Schedule 2 - Credit Borrowing Base Reduction Amount (Section 1.1)
Schedule 3 - Litigation; Judgments (Section 8.6)
Schedule 4 - Existing Debt (Section 10.1 (ii))
Schedule 5 - Subsidiaries (Section 8.11)
Schedule 6 - Existing Liens (Section 10.2(a), 8.22)
Schedule 7 - Taxes (Section 8.15)
Schedule 8 - Trade Names (Section 8.16)
Schedule 9 - Make-Up; Gas Imbalances (Section 8.20)
Schedule 10 - Production and Delivery Agreements (Section 1.1)
Schedule 11 - Title Curative Requirements (Section 9.2(d))
Schedule 12 - Claims Against Mortgaged Properties (Section 8.22)
Schedule 13 - Existing Loans, Advances, Investments (Section 10.6(e))
Schedule 14 - Environmental Matters (Section 8.19)
Schedule 15 - Current Purchasers of Production (Section 9.2(c))

EXHIBITS

Exhibit A - Credit Note
Exhibit B - Advance Request Form
Exhibit C-1 - Oil and Gas Mortgage - Texas
Exhibit C-2 - Oil and Gas Mortgage - Louisiana
Exhibit C-3 - Oil and Gas Mortgage - Alabama
Exhibit D - Guaranty
Exhibit E - Letter Transfer Order

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<PAGE> 6
CREDIT AGREEMENT

THIS CREDIT AGREEMENT (the "Agreement", certain other terms used
herein shall have the meanings assigned thereto in Article I of this
Agreement), dated as of January 12, 1995, is by and between KCS ENERGY
MARKETING, INC., a New Jersey corporation ("Borrower") and COMERICA BANK-TEXAS,
a Texas banking corporation ("Bank").

RECITALS

The Borrower and KCS Energy, Inc. ("KCS") have requested that Bank
provide for the extension of credit to the Borrower in an aggregate principal
amount of up to but not exceeding $25,000,000.00 and Bank is prepared to extend
such credit upon the terms and subject to the conditions hereinafter set forth.

To induce Bank to extend such credit, Borrower and KCS will execute
and deliver such documents, instruments and agreements as Bank shall reasonably
request to evidence their respective agreements with respect to such credit,
each of such Persons expecting to derive direct benefit from the credit so
extended to the Borrower, both in its separate capacity and as a member of the
integrated group.

NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, and for other good, fair and valuable
considerations, and, additionally, as to the Borrower, for reasonably
equivalent value received, the receipt and sufficiency of all of which are
hereby acknowledged, the parties hereto agree as follows:

ARTICLE I

Definitions

Section 1.1 Definitions. As used in this Agreement, the
following terms shall have the following meanings:

"Additional Properties" means Oil and Gas Properties now or
hereafter owned by Borrower which are not identified in Schedule 1, as
such schedule is delivered on the Closing Date.

"Adjusted CD Rate" means, for any CD Advance during any
Interest Period therefor, the rate per annum (rounded upwards, if
necessary, to the nearest 1/100 of 1%) determined by Bank to be equal
to the sum of (a) the CD Rate for such CD Advance for such Interest
Period divided by 1 minus the Reserve Requirement for such CD Advance
for such Interest Period plus (b) the Assessment Rate for such
Interest Period.

"Adjusted LIBO Rate" means, for any LIBOR Advance during
any Interest Period therefor, the rate per annum (rounded upwards, if
necessary, to the nearest 1/100 of 1%) determined by Bank to be equal
to the LIBO Rate for such LIBOR Advance for such Interest Period
divided by 1 minus the Reserve Requirement for such LIBOR Advance for
such Interest Period.
<PAGE> 7
"Advance" means any advance of funds by Bank to Borrower
pursuant to this Agreement, and after each initial advance thereof,
any portion thereof remaining outstanding and unpaid.

"Advance Request Form" means a certificate, in
substantially the form of Exhibit B hereto, properly completed and
signed by Borrower requesting an Advance.

"Affiliate" means, of any designated Person, each Person
which, directly or indirectly, controls or is controlled by or is
under common control with such designated Person and, without limiting
the generality of the foregoing, shall include (i) any Person which
beneficially owns or holds 10% or more of any class of voting
securities of such designated Person or 10% or more of the equity
interest in such designated Person and (ii) any Person of which such
designated Person beneficially owns or holds 10% or more of any class
of voting securities or in which such designated Person beneficially
owns or holds 10% or more of the equity interest. For the purposes of
this definition, control (including, with correlative meanings, the
terms "controlled by" and "under common control with), as used with
respect to any Person, shall mean the possession, directly or
indirectly, of the power to direct or cause the direction of the
management and policies of such Person, whether through the ownership
of voting securities or by contract or otherwise.

"Agreed Maximum Rate" means, at any time, a per annum rate
of interest equal to 4% plus the Highest Applicable Rate, which Agreed
Maximum Rate shall apply only during any period while there is no
Maximum Rate applicable to the loan transaction evidenced hereby or to
the Credit Note.

"Agreement", "hereof", "hereto", "hereunder" and words of
similar import means this Credit Agreement as a whole, and not any
particular article, section or subsection.

"Alternate Reserve Reports" means the reports described in
Section 9.15(b).

"Applicable Law" means the law in effect, from time to
time, applicable to this loan transaction and each Loan Document which
lawfully permits the charging and collection of the highest
permissible lawful, non-usurious rate of interest on each Loan
Document and the transactions evidenced thereby, and arising in
connection therewith (including, but without limitation, the Credit
Note), including laws of the State of Texas and, to the extent
controlling, the laws of the United States of America. To the extent
that Applicable Law is determined by reference to Article 1.04, Title
79, Revised Civil Statutes of Texas, 1925, as amended, the interest
ceiling applicable hereto and in connection herewith shall be the
"indicated" (weekly) rate ceiling as defined in said Article 1.04;
provided however, it is agreed that the terms hereof, including the
rate, or index, formula or provision of law used to

<PAGE> 8
compute the rate in connection herewith, will be subject to the
revisions as to current and future balances, from time to time,
pursuant to Applicable Law. It is further agreed that in no event
shall Chapter 15 of Subtitle 3, Title 79, Revised Civil Statutes of
Texas, 1925, as amended, apply to any Loan Document or the
transactions evidenced thereby, and arising in connection therewith.

"Applicable Rate" means: (i) during the period that an
Advance is a Prime Rate Advance, the Prime Rate plus one- fourth of
one percent (1/4%); (ii) during the period that an Advance is a LIBOR
Advance, the Adjusted LIBO Rate plus two percent (2 %); and (iii)
during the period that an Advance is a CD Advance, the Adjusted CD
Rate plus three percent (3%).

"Assessment Rate" means, at any time, the rate (rounded
upwards, if necessary, to the nearest 1/100 of 1%) then charged by the
Federal Deposit Insurance Corporation (or any successor) to Bank for
deposit insurance for Dollar time deposits with Bank at its Principal
Office as determined by Bank. The Assessment Rate determined by Bank,
in the absence of manifest error, shall be conclusive and binding.

"Authorized Representative" means James W. Christmas,
Chairman, Harry Lee Stout, President, or Henry A. Jurand, Treasurer
and Secretary, and in any event, shall mean no other Person or Persons
except as modified pursuant to a certificate sent to Bank signed by an
Authorized Representative of Borrower and in each such event, only
after Bank has had a reasonable opportunity to act upon such
certification.

"Bank" shall have the meaning ascribed to such term in the
introductory paragraph hereof.

"Business Day" means (i) any day on which commercial banks
are not authorized or required to close in Houston, Texas, and (ii)
with respect to all borrowings, payments, conversions, continuations,
Interest Periods, and notices in connection with LIBOR Advances, any
day which is a Business Day described in clause (i) above and which is
also a day on which dealings in Dollar deposits are carried out in the
London interbank market.

"CERCLA" shall have the meaning ascribed to such term in
the definition of Environmental Laws.

"CD Advance" means any Advance that bears interest at a
rate based upon the Adjusted CD Rate.

3
<PAGE> 9
"CD Rate" means, for any CD Advance for any Interest Period
therefor, the rate of interest per annum determined by Bank to be the
average (in accordance with its customary practices and rounded
upwards, if necessary, to the nearest 1/100 of 1%) of the bid rates
quoted to Bank at approximately 9:00 a.m. Houston, Texas time (or as
soon thereafter as practicable) on the first day of such Interest
Period by three (3) or more certificate of deposit dealers of
recognized national standing selected by Bank for the purchase at face
value of domestic certificates of deposit of Bank having a term
comparable to such Interest Period and in an amount comparable to the
principal amount of the CD Advance to which such Interest Period
relates. Each determination by Bank of the CD Rate shall, in the
absence of manifest error, be conclusive and binding.

"Closing Date" means January 12, 1995.

"Code" means the Internal Revenue Code of 1986, as amended.

"Collateral" has the meaning specified in Section 6.1.

"Concentration Account" means any one or more deposit or
similar accounts from time to time maintained by KCS into which
account or accounts KCS retains all cash receipts and other funds
forwarded to it by each of its Subsidiaries, for the exclusive account
of the Subsidiary that remits such funds, pending disbursement
therefrom to such Subsidiary's Disbursement Account.

"Consolidated Net Income" shall have the meaning ascribed
to such term in the Guaranty.

"Corporate Entity" shall have the meaning ascribed to
such term in Section 7.1(a).

"Credit Borrowing Base" means, at any time a determination
thereof is to be made, the aggregate amounts of the indebtedness which
can be adequately supported by Bank's loan value of oil and gas
reserves attributable to the Oil and Gas Properties included in the
Mortgaged Properties with respect to which Bank has (a) a perfected,
first-priority Lien in its favor and (b) received title opinions or
other evidence that title is vested in Borrower, in each event in
form, scope and substance satisfactory to Bank. Such amount of
indebtedness and value shall be determined by Bank in accordance with
the procedures set forth in Section 2.6, in the exercise of its sole
discretion, and in accordance with the standards, policies and
practices established by Bank from time to time for oil and gas loans,
taking into account, among other things, the following: (i)
information to be furnished to Bank by Borrower pursuant to this
Agreement; (ii) Bank's estimates of the potential cash flow needed
from the Oil and Gas Properties included in the Mortgaged Properties
to satisfy the Obligations; (iii)

4
<PAGE> 10
Borrower's other cash flow requirements during the term of this
Agreement; (iv) Bank's engineer's adjustments of reserve volumes and
economics as required by Bank's policies; (v) pricing of production
being based upon the lesser of (A) prices actually received by the
Borrower and (B) prices set by Bank from time to time and utilized in
evaluating its other oil and gas loans with consideration given to any
hedging contracts maintained by Borrower which are satisfactory to
Bank; (vi) escalation in prices at the same rate and evaluated by the
same discount factor, as Bank utilizes for its other oil and gas
loans, and with respect to similarly-situated properties securing such
loans; (vii) the existence of perfected, first-priority Liens in favor
of Bank in, and the degree of title assurance with respect to the Oil
and Gas Properties included in the Mortgaged Properties which are
included in Engineering Reports; (viii) the production history of the
reserves; (ix) contract status, take-or-pay or gas imbalancing, (x)
concentration of reserves; (xi) nature of ownership of the reserves;
(xii) the quality, reputation, history and financial condition of
operators and purchasers of production; (xiii) the mode of recovery
and the existence of current, and likelihood of future, technology
regarding recovery methods; (xiv) the financial condition of Borrower;
and (xv) the existence of other Debt and Liens of the Borrower in any
such Oil and Gas Properties.

"Credit Borrowing Base Reduction Amount" means an amount by
which the Credit Borrowing Base is reduced quarterly (on each Interest
Payment Date) as reflected on Schedule_2 hereto, as such amount may be
redetermined by Bank from time to time in connection with the
redetermination of the Credit Borrowing Base by Bank pursuant to
Section 2.6 hereof.

"Credit Commitment" means the conditional, maximum
aggregate amount of principal that may ever be outstanding under the
Credit Note prior to the Credit Maturity Date if and only if such
amount is supported by the Credit Borrowing Base as such is determined
by Bank under this Agreement and as otherwise qualified and referenced
in clause (iii) of Section 8.25, which amount shall never exceed
$25,000,000.00, and as such maximum amount may be reduced pursuant to
Section 2.6, Section 3.1 or otherwise.

"Credit Note" means the promissory note payable to the
order of Bank, in substantially the form of Exhibit A hereto.

"Credit Maturity Date" means 2:00 p.m. Houston, Texas time
on February 1, 1998, or such earlier date and time on which the
obligation of Bank to make Advances terminates and all Obligations
with respect to the Credit Note are immediately due and payable as
provided in this Agreement.

"Debt" means for any Person (without duplication): (i) all
indebtedness, whether or not represented by bonds, debentures, notes,
securities or other evidences of indebtedness,

5
<PAGE> 11
for the repayment of borrowed money (ii) all indebtedness representing
deferred payment of the purchase price of Property, assets or
services, other than trade account payables arising, and accrued
expenses incurred, in the ordinary course of business so long as such
trade accounts payables or accrued expenses are payable within 120
days of the date the respective goods are delivered or the respective
services are rendered, or if such trade account payables or accrued
expenses are not paid within such 120-day period, the payment thereof,
if due under terms of purchase, is being diligently contested in good
faith by such Person and cash reserves for the full and final payment
thereof are being maintained by such Person, (iii) all indebtedness
under any lease which, in conformity with GAAP, is required to be
capitalized for balance sheet purposes, (iv) all indebtedness under
guaranties, endorsements (other than for collection or deposit in the
ordinary course of business), assumptions, or other contingent
obligations, in respect of, or to purchase or otherwise acquire,
indebtedness of others, (v) all indebtedness secured by a Lien
existing on Property owned by the Person, whether or not the
indebtedness secured thereby shall have been assumed, the aggregate
amount of such indebtedness being equal to the lesser of (A) the
aggregate outstanding dollar amount of such indebtedness and (B) the
aggregate fair market value of such encumbered Property, (vi) all
indebtedness (whether contingent or otherwise) in respect of letters
of credit, bankers' acceptances, surety or other bonds and similar
instruments, (vii) all indebtedness and undertakings to maintain or
cause to be maintained the financial position or financial covenants
of any other Person, and (viii) any obligation to redeem or repurchase
any of such Person's capital stock, warrants, or stock equivalents.

"Default" means any event or condition specified in Section
11.1 whether or not any requirement for notice or lapse of time, or
both, or any other condition has been satisfied.

"Default Rate" means the per annum rate of interest equal
to the lesser of (i) the Maximum Rate and (ii) the sum of the Prime
Rate plus three percent.

"Disbursement Account" means any one or more deposit or
similar accounts from time to time maintained by, and over which sole
disbursement or withdrawal right is controlled by Borrower.

"Dollars" and "$" shall mean lawful money of the United
States of America.

"Engineering Reports" shall have the meaning ascribed to
such term in Section 2.6(b).

"Environmental Laws" means any and all laws, statutes,
ordinances, rules, regulations, orders, requirements or determinations
of any Governmental Authority pertaining to health or the
environment in effect in any and all jurisdictions in which time has
conducted business, or where any Borrower or KCS, or any of their
Subsidiaries, is conducting or at any time has conducted business, or
where any

<PAGE> 12
Property of Borrower or KCS, or any of their Subsidiaries, is
located, or where any hazardous substances generated by or disposed of
by Borrower or KCS, or any of their Subsidiaries, are located,
including without limitation, the Clean Air Act, as amended, the
Comprehensive Environmental, Response, Compensation and Liability Act
of 1980 ("CERCLA"), as amended, the Federal Water Pollution Control
Act, as amended, the Occupational Safety and Health Act of 1970, as
amended, the Resource Conservation and Recovery Act of 1976 ("RCRA"),
as amended, the Safe Drinking Water Act, as amended, the Toxic
Substances Control Act, as amended, the Superfund Amendments and
Reauthorization Act of 1986, as amended, and other environmental
conservation or protection laws. The terms "hazardous substance",
"release" and "contaminants" have the meanings specified in CERCLA, and
the terms "solid waste", "hazardous waste" and "disposal" (or
"disposed") have the meanings specified in RCRA; provided, however, in
the event either CERCLA or RCRA is amended so as to broaden the meaning
of any term defined thereby, such broader meaning shall apply
subsequent to the effective date of such amendment with respect to all
provisions of each Loan Document, and provided further that, to the
extent the laws of the state in which any Property of Borrower or KCS,
or any of their Subsidiaries, is located establish a meaning for
"hazardous substance", "solid waste" or "disposal" which is broader
than that specified in either CERCLA or RCRA, such broader meaning
shall apply with respect to such state.

"Event of Default" means any of the events or conditions
specified in Section 11.1, provided that any applicable requirement
for notice or lapse of time, or both, or any other specified condition
has been satisfied.

"Excepted Liens" shall have the meaning ascribed to such
term in Section 8.7.

"Fixed Rate Advances" means CD Advances and LIBOR Advances.

"GAAP" means generally accepted accounting principles,
applied on a consistent basis, including, but without limitation, as
set forth in Opinions of the Accounting Principles Board of the
American Institute of Certified Public Accountants and/or in
statements of the Financial Accounting Standards Board and/or their
respective successors and which are applicable in the circumstances as
of the date in question. Accounting principles are applied on a
"consistent basis" when the accounting principles observed in a
current period are comparable in all material respects to those
accounting principles applied in a preceding period.

"Governmental Authority" means any domestic or foreign
federal, state, county, city, municipality or political subdivision in
which any Property of Borrower or KCS, or any of their Subsidiaries,
is located or which exercises jurisdiction over any such Property, and
any

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<PAGE> 13
agency, department, commission, board, tribunal, court, bureau or
instrumentality of any of them which exercises or has jurisdiction
over any such Property.

"Governmental Requirement" means (without duplication) any
law, statute, code, ordinance, order, rule, regulation, judgment,
decree, injunction, franchise, permit, certificate, license,
authorization or other direction or requirement (including, without
limitation, Environmental Laws, energy regulations and occupational,
safety and health standards or controls) of any Governmental
Authority.

"Guaranteed Obligations" shall have the meaning ascribed to
such term in the Guaranty.

"Guaranty" means those Guaranty Agreements entered into,
dated, executed and delivered by KCS and Proliq, Inc. as of the date
of this Agreement, in substantially the form of Exhibit D hereto,
which Guaranty Agreements evidence the payment guaranty obligations in
respect to this Agreement and the documents, instruments and
agreements executed and/or delivered from time to time in connection
herewith, all as therein provided.

"Hydrocarbons" means all oil, gas, casinghead gas, drip
gasoline, natural gasoline, condensate, distillate, liquid
hydrocarbons, gaseous hydrocarbons and all other minerals, and all
products obtained, refined or processed therefrom.

"Indemnified Matters" shall have the meaning ascribed to
such term in Section 12.2.

"Indemnitees" shall have the meaning ascribed to such term
in Section 12.2.

"Initial Reserve Report" means the reports of Ryder Scott
dated as of July 1, 1994, with respect to Oil and Gas Properties of
the Borrower, and each amendment, supplement and modification thereto
received by Bank prior to the Closing Date.

"Interest Payment Date" means the first day of April, July,
October and January of each year, commencing April 1, 1995 and
continuing thereafter until and including the Credit Maturity Date.

"Interest Period" means:

(i) With respect to any LIBOR Advance, the period
commencing on the date, as applicable, such Advance is
made or converted from an Advance of another Type or, in the
case of each subsequent, successive Interest Period
applicable to a LIBOR Advance, the last day of the next
preceding Interest Period with respect to

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<PAGE> 14
such Advance, and ending on the numerically corresponding
day in the first, second, or third calendar month
thereafter, as Borrower may select as provided in Section
2.3 hereof, except that each such Interest Period which
commences on the last Business Day of a calendar month (or
on any day for which there is no numerically corresponding
day in the appropriate subsequent calendar month) shall end
on the last Business Day of the appropriate subsequent
calendar month.

(ii) With respect to any CD Advance, the period
commencing on the date, as applicable, such Advance is made
or converted from an Advance of another Type or, in the
case of each subsequent, successive Interest Period
applicable to a CD Advance, the last day of the next
preceding Interest Period with respect to such Advance, and
ending on the day 30, 60 or 90 days thereafter, as Borrower
may select as provided in Section 2.3 hereof.

Notwithstanding the foregoing: (a) each Interest Period which would
otherwise end on a day which is not a Business Day shall end on the next
succeeding Business Day (or, in the case of an Interest Period for a LIBOR
Advance if such succeeding Business Day fails in the next succeeding calendar
month, on the next preceding Business Day); (b) no more than three (3) Interest
Periods for Fixed Rate Advances shall be in effect at the same time; (c) no
Interest Period for any Fixed Rate Advance shall have a duration of less than
one (1) month (in the case of LIBOR Advances) or thirty (30) days (in the case
of CD Advances) and, if the Interest Period for any Fixed Rate Advance would
otherwise be a shorter period, such Advance shall not be available hereunder;
and (d) no Interest Period may extend beyond a principal repayment date or
commitment reduction date unless, after giving effect thereto, the aggregate
principal amount of the Fixed Rate Advances having Interest Periods that end
after such principal payment date or Commitment reduction date shall be equal
to or less than the Advances to be outstanding hereunder after such principal
payment date or commitment reduction date.

"KCS" shall mean KCS Energy, Inc., a Delaware corporation.

"Letter Transfer Orders" means letters addressed to
purchasers of production and/or, at the sole discretion of Bank,
operators of wells or other Persons designated as the "payor" pursuant
to Section 91.401 of the Texas Natural Resources Code, from the Oil
and Gas Properties included in the Mortgaged Properties executed by
Borrower placing such addressees on notice of the Security Documents
and directing such addressees to make settlement for such production
to Bank for the account of Borrower, in form and substance of Exhibit
E hereto and otherwise satisfactory to Bank.

"LIBOR Advance" means any Advance that bears interest at a
rate based upon the Adjusted LIBO Rate.

9
<PAGE> 15
"LIBO Rate" means, for any LIBOR Advance for any Interest
Period therefor, the rate of interest per annum (determined by Bank)
to be the average (rounded upwards, if necessary, to the nearest 1/100
of 1 %) of the rates quoted by Bank at approximately 11:00 a.m. London
time (or as soon thereafter as practicable) two (2) Business Days
prior to the first day of such Interest Period for the offering by
Bank to leading banks in the London interbank market of Dollar
deposits for delivery on the first day of such Interest Period, in
immediately available funds, having a term comparable to such Interest
Period and in an amount comparable to the principal amount of the
LIBOR Advance to which such Interest Period relates. Each
determination by Bank of the applicable LIBO Rate shall, in the
absence of manifest error, be conclusive and binding.

"Lien" means any interest in Property securing an
obligation owed to, or a claim by, a Person other than the owner of
the Property, whether such interest is based on the common law,
statute or contract, and whether such obligation or claim is fixed or
contingent, and including but not limited to (i) the lien or security
interest arising from a mortgage, deed of trust, assignment,
encumbrance, pledge, security agreement, conditional sale or trust
receipt or a lease, consignment or bailment for security purposes or
(ii) production payments and the like payable out of Oil and Gas
Properties. The term "Lien" shall include reservations, exceptions,
encroachments, easements, rights of way, covenants, conditions,
restrictions, leases and other title exceptions and encumbrances
affecting Property. For the purposes of this Agreement, Borrower
shall be deemed to be the owner of any Property which it has acquired
or holds subject to a conditional sale agreement, financing lease or
other arrangement pursuant to which title to the Property has been
retained by or vested in some other Person in a transaction intended
to create a security interest.

"Loan Documents" means this Agreement, the Credit Note, the
Debit Authorizations, the Security Documents and all promissory notes,
reports, opinions, certificates and other instruments, documents, and
agreements now or hereafter executed and delivered pursuant to, or in
connection with, this Agreement.

"Material Adverse Effect" means, with respect to any
Person, a material and adverse effect on (i) the condition (financial
or otherwise) of such Person, or (ii) its ability to fulfill,
punctually and completely, its obligations under each Loan Document.

"Maximum Rate" shall mean the maximum lawful non-usurious
rate of interest (if any) which, under Applicable Law, Bank is
permitted to charge Borrower on the transactions evidenced by, and
arising in connection with, the Loan Documents from time to time in
effect and to which each is a party, including changes in such Maximum
Rate attributable to changes under Applicable Law which permit a
greater rate of interest to be contracted for, charged, collected,
received, taken or reserved as of the effective dates of the
respective changes.

10
<PAGE> 16
"Mortgages" means the Oil and Gas Mortgages.

"Mortgaged Properties" means the following Properties of
Borrower, now owned or existing or hereafter acquired or arising, to
the extent such are described as Properties encumbered in favor of, or
assigned to, Bank pursuant to any one or more Security Documents: (i)
Properties described as encumbered in favor of, or assigned to, Bank
under any one or more of the Security Documents, including, but not
limited to, the Oil and Gas Properties identified in Schedule 1
hereto, and all Hydrocarbon production from such Oil and Gas
Properties to the extent such production is the Property of the
Borrower pursuant to any of the volumetric production payment
contracts or conveyances identified on Schedule 1 hereto; (ii) any
other Oil and Gas Properties, including, without limitation, the
Additional Properties, if any, from time to time included in the
Credit Borrowing Base as referred to in Section 2.6(d), and the
Hydrocarbon production therefrom, that are hereafter described as
encumbered in favor of, or assigned to, Bank under any one or more the
Security Documents and (iii) all deeds of trust, mortgages,
assignments, security agreements, financing statements and other
agreements granted in favor of Borrower by any Person from which
Borrower acquired its interest in Oil and Gas Properties identified on
Schedule 1 or any Additional Properties and which secure the
obligations of any such Person to Borrower and which are encumbered in
favor of or assigned to Bank under one or more of the Security
Documents.

"Obligations" means all obligations, indebtedness, fees,
expenses, costs, indemnities and liabilities of Borrower to Bank, now
existing or hereafter arising, whether direct, indirect, related,
unrelated, fixed, contingent, liquidated, unliquidated, joint,
several, or joint and several, under, or in connection with, this
Agreement and the other Loan Documents, including, without limitation
and all interest accruing hereon and thereon and all attorneys' fees
and other expenses required to be paid by Borrower hereunder and
thereunder.

"Oil and Gas Mortgages" means the deed of trust,
assignment, security agreement, financing statement and Assignment of
Production and the Act of Mortgage and Security Agreement covering,
among other Property, certain of the Oil and Gas Properties of
Borrower, in substantially the form of Exhibits C-1, C-2 and C-3
hereto, as the same may be supplemented from time to time by one or
more Supplemental Mortgages.

"Oil and Gas Properties" means and includes (i) all rights,
titles, interests and estates of Borrower in and to all Hydrocarbons
prior to severance, and all contracts or arrangements granting
interests in Hydrocarbons or proceeds of Hydrocarbons prior to
severance, including without limitation all royalties, overriding
royalties, net profits interests, production payments and similar
mineral interests, and all unsevered oil, gas and other minerals in,
under, or

11
<PAGE> 17
attributable to any of the foregoing properties and interests (the
rights, titles, interests and estates described in this clause (i) are
collectively referred to as the "Hydrocarbon Interests"); (ii) all
presently existing and future contracts and other agreements which
relate to any of the Hydrocarbon Interests or the production, sale,
purchase, delivery, exchange, transporting, treating or processing of
Hydrocarbons from or attributable to such Hydrocarbon Interests and
any renewals, extensions, substitutions, ratifications, supplements,
amendments and replacements of or for any of the foregoing, including
but not limited to the Production and Delivery Agreements described in
Schedule 10 and any contracts of similar import which relate to any of
the Hydrocarbon Interests; (iii) all Hydrocarbons in and under and
which may be produced and/or saved from or attributable to the
Hydrocarbon Interests, and all oil in tanks and all rents, issues,
profits, proceeds, products, revenues and other incomes from or
attributable to the Hydrocarbon Interests; (v) all rights- of-way,
easements, servitudes, licenses, permits, grants, estates, rights,
benefits and privileges related to the Hydrocarbon Interests, together
with all additions, substitutions, replacements, accessions and
attachments to any and all of the foregoing; (vi) all accounts,
contract rights and general intangibles arising from, or with respect
to, the Hydrocarbon Interests, rights, titles, interests and estates
described or referred to hereinabove; and (vii) all rents, issues,
profits, revenues, other income and other benefits arising from any of
the foregoing.

"Person" means any individual, corporation, business trust,
association, company, partnership, joint venture, trust,
unincorporated organization or governmental authority, or any agency,
tribunal, court, instrumentality subdivision thereof, or any other
form of entity.

"Principal Office" means the office of Bank currently
located at 1300 Northpark Center, Dallas, Texas 75225 or such other
office or location as Bank shall designate as its principal office by
written notice to Borrower.

"Prime Rate" means on any date and with respect to all
Prime Rate Advances, a fluctuating rate of interest per annum equal to
the rate of interest most recently established by Bank as its prime
rate, with the understanding that such prime rate may be one of
several rates charged by Bank with respect to commercial loans and
serves as a basis upon which effective rates of interest are from time
to time calculated for loans by making reference thereto and may not
be the lowest of such rates. Changes in the rate of interest on Prime
Rate Advances will take effect simultaneously with each change in the
Prime Rate.

"Prime Rate Advance" means any Advance that bears interest
at a rate based upon the Prime Rate.

"Proceeds of Production" means, for any period a
determination is to be made, the amounts attributable to the proceeds
from the sale of Hydrocarbons from the Oil and Gas

12
<PAGE> 18
Properties included in the Mortgaged Properties and received by any
Borrower during such period after deduction of all (i) pipeline, ad
valorem, production, windfall profits, severance, gathering, excise
and other similar taxes, assessed against or measured by Hydrocarbons
produced from or attributable to the Mortgaged Properties, except for
federal and state income taxes; (ii) royalties, overriding royalties
and other burdens on production; and (iii) production payments, net
profits interests, and other interests in and measured by production
burdening such Mortgaged Properties and permitted under the Security
Documents.

"Property" means any interest in any kind of property or
asset, whether real, personal or mixed, tangible or intangible.

"Purchaser" means each purchaser of production from, or
operator of, or other Person designated as the "payor" pursuant to
Section 91.401 of the Texas Natural Resources Code with respect to
Borrower's interest in Hydrocarbon production from the Mortgaged
Properties.

"Qualified Bank" means (i) Bank, or (ii) any commercial
bank located in the United States of America, which is organized under
the laws of the United States of America or any state thereof, insures
its deposits with the Federal Deposit Insurance Corporation (or any
successor) and has capital, surplus and undivided profits aggregating
at least $100,000,000 as of the date of such commercial bank's most
recent financial report.

"Regulation D" means Regulation D of the Board of Governors
of the Federal Reserve System as the same may be amended or
supplemented from time to time.

"Regulatory Change" means, with respect to Bank, any change
after the date of this Agreement in the United States federal, state,
or foreign laws or regulations (including Regulation D) or the
adoption or making after such date of any interpretations, directives,
or requests applying to a class of banks including Bank of or under
any United States federal or state, or any foreign, laws or
regulations (whether or not having the force of law) by any court or
governmental or monetary authority charged with the interpretation or
administration thereof.

"Reports" mean (i) as of the Closing Date and until the
delivery of the initial Engineering Report required hereunder, the
Initial Reserve Report, and (ii) upon the delivery of the initial
Engineering Report required hereunder, such Engineering Report, and
thereafter, until the delivery of each subsequent Engineering Report
required hereunder, each Engineering Report delivered pursuant hereto.

"Reserve Report" means the report described in Section
9.13(a).

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<PAGE> 19
"Reserve Requirement" means, for any Fixed Rate Advance for
any Interest Period therefor, the average maximum rate at which
reserves (including any marginal, supplemental or emergency reserves)
are required to be maintained during such interest Period under
Regulation D by member banks of the Federal Reserve System in Houston,
Texas with deposits exceeding one billion Dollars against (a) in the
case of any LIBOR Advance, "Eurocurrency Liabilities" (as such term is
used in Regulation D) or (b) in the case of any CD Advance,
three-month nonpersonal Dollar time deposits in an amount of $100,000
or more. Without limiting the effect of the foregoing, the Reserve
Requirement shall reflect any other reserves required to be maintained
by such member banks by reason of any Regulatory Change against (i)
any category of liabilities which includes deposits by reference to
which the Adjusted LIBO Rate or Adjusted CD Rate (as the case may be)
is to be determined, or (ii) any category of extensions of credit or
other assets which include LIBOR Advances or CD Advances. Each
determination by Bank of the applicable Reserve Requirement shall, in
the absence of manifest error, be conclusive and binding.

"Restriction Event" means any of the following: (i) the
occurrence of a Default or an Event of Default and so long as such
Default or Event of Default shall continue to exist; or (ii) the
occurrence of any offset or similar right or remedy exercised against
the Concentration Account by the depository institution at which such
account is maintained, which offset or similar right or remedy is made
for (A) borrowed money indebtedness owed by KCS to such institution or
(B) other indebtedness owed to such institution, which other
indebtedness is not of an inconsequential amount or nature; or (iii)
the occurrence of any Lien being asserted against or with respect to,
or any levy, execution, attachment, garnishment or other legal process
or action being served or enforced (or attempted to be served or
enforced) against or with respect to, the Concentration Account, and,
as applicable, so long as such Lien shall continue to be asserted or
until such levy, execution, attachment, garnishment or other legal
process or action is fully and finally dismissed; or (iv) any Lien is
created by KCS in or with respect to the Concentration Account, and so
long as any such Lien shall so exist; or (v) the occurrence of any
event or circumstance that causes Bank reasonably to believe that the
Concentration Account may become subject to any of the occurrences
referred to in the preceding clauses (i) through (iv) and the written
notification by Bank to KCS and Borrower of such reasonable belief,
and so long thereafter until Bank has subsequently notified, in
writing, KCS and Borrower that Bank no longer maintains such
reasonable belief, which subsequent notification by Bank shall not be
unreasonably withheld or delayed.

"SEC" means the Securities and Exchange Commission or any
successor to the function of such agency.

"Security Documents" means all mortgages, deeds of trust,
assignments, pledges, security agreements, financing statements,
guarantees, consents, waivers, subordination

14
<PAGE> 20
agreements or similar instruments now or hereafter securing, relating
to the security of, and/or guarantying the repayment and performance
of the Obligations or any part thereof, or relating thereto,
including, without limitation, the Oil and Gas Mortgages, the
Guaranty, the Letter Transfer Orders, and related financing
statements, registrations, and other filings.

"Subsidiary" means, as to any Person, a corporation of
which shares of stock having ordinary voting power (other than stock
having such power only by reason of the happening of a contingency) to
elect a majority of the board of directors or other managers of such
corporation are at the time owned, or the management of which is
otherwise controlled, directly or indirectly, through one or more
intermediaries, or both, by such Person, or a limited or general
partnership of which such Person or any of its Subsidiaries is a
general partner or a business trust in which such Person holds a
majority interest comparable to that for a corporation as described
above.

"Texas UCC" means the Uniform Commercial Code as adopted
and amended by the State of Texas. Terms used herein which are
defined in the Texas UCC (including, without limitation, the term
"deposit account"), unless otherwise specifically defined herein,
shall have the meanings specified in the Texas UCC.

"Total Credit Principal" means, at any time, the aggregate
principal amount outstanding under the Credit Note attributable to
Advances.

"Type" means any type of Advance (that is, Prime Rate
Advance, LIBOR Advance, or CD Advance).

Section 1.2 Use, and Construction of Defined Terms; References
and Headings.

(a) All terms defined in this Agreement shall have their
defined meanings when used in each of the other Loan Documents, unless any of
such instruments shall expressly indicate otherwise, and, when required by the
context, each term shall include the plural as well as the singular.
Definitions of each Person specifically defined herein or in each other Loan
Document shall mean and include herein and therein, unless otherwise expressly
provided to the contrary, the successors, assigns, heirs and legal
representatives of each such Person. Unless the context otherwise requires or
unless otherwise expressly provided, references to this Agreement and each
other Loan Document shall include all amendments, modifications, supplements,
restatements, ratifications, renewals, increases, extensions and rearrangements
thereof or thereto, as applicable and as in effect from time to time; provided,
however, nothing contained in this sentence shall be construed to authorize any
Person to execute or enter into any such amendments, modifications,
supplements, restatements, ratifications, renewals, increases, extensions or
rearrangements to a Loan Agreement to which it is

15
<PAGE> 21
a party, unless entered into and executed pursuant to the applicable provisions
of the respective Loan Documents.

(b) Each reference herein to a Section, or any subdivision
thereof, shall refer to the applicable Section, or subdivision thereof, of this
Agreement, unless another instrument is thereby expressly referenced. Further,
each reference herein to an Exhibit or Schedule shall refer to the applicable
Exhibit or Schedule attached hereto, unless another instrument is thereby
expressly referenced. The headings in this Agreement and the other Loan
Documents are inserted for convenience only and shall be ignored when
construing any such instruments.

(c) Unless otherwise defined in this Agreement, all capitalized
terms that are defined in the Guaranty shall have the same meanings herein as
therein, and all defined terms shall have the same use and construction herein
as provided in the Guaranty, unless the context herein otherwise indicates.

Section 1.3 Accounting Terms. Except as otherwise expressly
provided herein or in another Loan Document, accounting terms not specifically
defined and which are used herein and in the other Loan Documents shall be
construed, and all accounting procedures, calculations and reporting,
including, without limitation, the preparation of financial statements,
calculations and other financial information required to be furnished pursuant
to this Agreement or any other Loan Document, shall be performed, in accordance
with GAAP consistently applied.

ARTICLE II

Credit Facility

Section 2.1 Commitment for Advances. Subject to the terms and
conditions of this Agreement, and in reliance of the representations and
warranties of Borrower and KCS contained in each Loan Document, Bank agrees to
make one or more Advances to Borrower, from time to time from the date hereof
to and including the Business Day immediately preceding the Credit Maturity
Date, provided that the aggregate amount of all such Advances at any time
outstanding shall not exceed the lesser of (i) the Credit Borrowing Base, and
(ii) the Credit Commitment. Subject to the foregoing limitations, and the
other terms, conditions and provisions of this Agreement, Borrower may borrow,
repay, and reborrow hereunder by means of Advances until the Business Day
immediately preceding the Credit Maturity Date.

Section 2.2 Credit Note.

(a) The obligation of Borrower to repay the Advances, whether
outstanding as of the Closing Date or now or hereafter advanced, shall be
evidenced by the Credit Note executed by

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<PAGE> 22
Borrower, payable to the order of Bank, in the stated principal amount of the
Credit Commitment and dated the date hereof. The Total Credit Principal shall
bear interest from the Closing Date and prior to maturity at a varying rate per
annum equal from day to day to the lesser of (A) the Maximum Rate, and (B) the
Applicable Rate, each such change in the rate of interest charged on the Total
Credit Principal to become effective, without notice to Borrower or any other
Person, on the effective date of each change in the Applicable Rate or the
Maximum Rate, as the case may be; provided, however, if at any time the rate of
interest specified in clause (B) preceding shall exceed the Maximum Rate, then
the Applicable Rate shall be limited to the Maximum Rate during such time, and
at all times thereafter, the Applicable Rate on the Total Credit Principal
shall be the Maximum Rate, or if there is no Maximum Rate then in effect, the
Agreed Maximum Rate, until the aggregate amount of interest accrued on the
Total Credit Principal equals the aggregate amount of interest which would have
accrued on the Total Credit Principal if the interest rate specified in clause
(B) preceding had at all times been in effect. Accrued and unpaid interest on
the Total Credit Principal shall be due and payable on each Interest Payment
Date.

(b) Unless the maturity of the Credit Note shall have sooner
occurred pursuant to the provisions hereof and without extending the due date
of any payments of principal on the Credit Note required to have been made or
otherwise made pursuant to the provisions of this Agreement, the Total Credit
Principal under the Credit Note, shall be due and payable on the Credit
Maturity Date. All past due principal and, to the maximum extent permitted by
Applicable Law, all past due interest under the Credit Note and other amounts
herein and under each other Loan Document due, shall bear interest on the
amounts thereof from time to time remaining unpaid (both before and after
judgment) at the Default Rate.

Section 2.3 Requests for Advances. When requesting an Advance,
Borrower shall give Bank notice, and Bank shall have received such notice, by
means of an Advance Request Form of each requested Advance, at least on the
requested date of each Prime Rate Advance, at least two (2) Business Days
before the requested date of each CD Advance, and at least three (3) Business
Days before the requested date of each LIBOR Advance, specifying: (i) the
requested date of such Advance (which shall be a Business Day), (ii) the amount
of such Advance, (iii) the Type of the Advance, and (iv) in the case of a Fixed
Rate Advance, the duration of the Interest Period for such Advance. Bank, at
its option, may accept telephonic requests for Advances, provided that such
acceptance shall not constitute a waiver of Bank's right to require delivery of
an Advance Request Form in connection with subsequent Advances. Any telephonic
request for an Advance by Borrower shall be promptly confirmed by submission of
a properly completed Advance Request Form to Bank. Each Advance shall be in a
minimum principal amount of $500,000 or an integral multiple thereof. The
aggregate principal amount of LIBOR Advances having the same Interest Period
shall be at least equal to $500,000, and the aggregate amount of CD Advances
having the same Interest Period shall be at least equal to $500,000. Bank will
make Advances available to the Borrower by depositing or wire transferring, as
applicable, the same in immediately available funds in or to, as applicable,
the account

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specified by Borrower. All notices under this Section shall be irrevocable and
shall be given not later than 10:00 a.m. Dallas, Texas time on the day which
is not less than the number of Business Days specified above for such notice.

Section 2.4 Conversions and Continuations. Borrower (whether or
not it initially had requested the Advance to be converted or continued, and
whether or not it previously had requested conversions or continuations with
respect thereto) shall have the right from time to time to convert all or a
part of one Type of Advance into another Type of Advance or to continue all or
part of an Advance by giving Bank written notice pursuant to an Advance Request
Form at least on the date of conversion into a Prime Rate Advance, at least two
(2) Business Days before conversion into or continuation of a CD Advance, and
at least three (3) Business Days before conversion into or continuation of a
LIBOR Advance, specifying: (i) the conversion or continuation date, (ii) the
amount of the Advance to be converted or continued, (iii) in the case of
conversions, the Type of Advance to be converted into, and (iv) in the case of
a continuation of or conversion into a Fixed Rate Advance, the duration of the
Interest Period applicable thereto; provided that (y) Fixed Rate Advances may
only be converted on the last day of the Interest Period, and (z) neither Prime
Rate Advances nor Fixed Rate Advances may be converted to, or, on the last
day(s) of the then current Interest Period(s) for outstanding Fixed Rate
Advances, continued as, as applicable, Fixed Rate Advances when an Event of
Default or Default has occurred and is continuing, or when any of the
conditions referred to in Section 7.2 (a), (b) and (c) are not then met. All
notices given under this Section shall be irrevocable and shall be given not
later than 10:00 a.m., Houston, Texas time, on the day which is not less than
the number of Business Days specified above for such notice. If Borrower shall
fail to give Bank the notice as specified above for continuation or conversion
of a Fixed Rate Advance prior to the end of the Interest Period with respect
thereto, such Fixed Rate Advance shall automatically be converted into a Prime
Rate Advance on the last day of the Interest Period for such Fixed Rate
Advance. Upon the occurrence of an Event of Default, Bank may convert all
Fixed Rate Advances to Prime Rate Advances at the end of the relevant Interest
Period, and Borrower agrees to pay any and all costs and expenses associated
with or related to such conversion. The provisions of the immediately
preceding sentence, however, shall not limit in any respect the obligation of
Borrower to pay interest at the Default Rate on all past due principal and, to
the maximum extent permitted by Applicable Law, all past due interest, whether
by acceleration or otherwise, as provided in Section 2.2.

Section 2.5 Use of Proceeds of Advances. The proceeds of each
Advance shall be used by Borrower solely for financing oil and gas volumetric
production payments and not in violation of any provision, term or agreement
contained herein with respect to the use of any such Advance or related
proceeds.

Section 2.6 Credit Borrowing Base; Credit Borrowing Base
Reductions; Mandatory Prepayments.

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(a) Notwithstanding anything to the contrary contained in this
Agreement or in any other Loan Document, the Total Credit Principal shall not
exceed the lesser of (i) the Credit Commitment and (ii) the Credit Borrowing
Base, and Bank shall never be required to make any Advance that would cause the
Total Credit Principal to exceed the Credit Borrowing Base. The Credit
Borrowing Base shall be cumulative of all other limitations contained in this
Agreement and the other Loan Documents. During the period from the date hereof
to the date of the first redetermination of the Credit Borrowing Base, the
Credit Borrowing Base shall be $10,000,000.

(b) Upon receipt of the reports required by Section 9.13 and
such other reports, data and supplemental information as may, from time to
time, be reasonably requested by Bank (the "Engineering Reports") each of the
foregoing together with a certificate from the president or chief financial
officer of Borrower that, to the best of such officer's knowledge after making
due inquiry, and in all material respects, (A) the factual information upon
which such Engineering Reports are based is true and correct, (B) the
certificate identifies the Properties covered by the Engineering Reports that
have not been previously included in any prior Engineering Reports, and (C) no
Mortgaged Properties have been sold since the date of the last Credit Borrowing
Base determination, Bank will evaluate the Properties covered by the
Engineering Reports. Based upon such information and such other information as
Bank deems appropriate, and , with respect to each Engineering Report due on or
before the 45th day following each September 30, on or before the following
January 1 or the 45th day following the receipt by Bank of such information,
whichever is earlier, and, with respect to each Engineering Report due on or
before the 45th day following each March 31, on or before the following July 1
or the 45th day following the receipt by Bank of such information, whichever is
earlier, assuming in each case that Bank has timely received all information
requested by it, Bank will make a redetermination of the Credit Borrowing Base
and the Credit Borrowing Base Reduction Amount, which redetermined Credit
Borrowing Base and Credit Borrowing Base Reduction Amount shall be effective
immediately upon such redetermination by Bank. Within three (3) Business Days
following such redetermination, Bank shall notify Borrower in writing of the
redetermined amount of the Credit Borrowing Base and the Credit Borrowing Base
Reduction Amount.

(c) Each redetermination of the Credit Borrowing Base and the
Credit Borrowing Base Reduction Amount shall be effective and applicable for
all purposes of this Agreement until the effective date of the next
redetermination, except as provided elsewhere in the Agreement and except for
such redetermination as Bank may reasonably conduct, at its sole discretion.
Borrower and Bank agree that Bank may determine the Credit Borrowing Base and
Credit Borrowing Base Reduction Amount more often than semi- annually and in
any manner it deems reasonable. Until such notification, the Credit Borrowing
Base and Credit Borrowing Base Reduction Amount established for the directly
preceding period shall remain in effect, and thereafter the new Credit
Borrowing Base and Credit Borrowing Base Reduction Amount as set forth in such
notification shall be in effect.

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<PAGE> 25
(d) In addition to the matters expressed in and referred to by
Sections 2.6(b) and 2.6(c) Borrower, from time to time before the Business Day
immediately preceding the Credit Maturity Date, may submit Additional
Properties to Bank for its consideration, in the exercise of its sole
discretion, of inclusion of any or all of same in the Credit Borrowing Base.
Upon receipt of reports, data, title information, opinions and supplemental
information requested by Bank with respect to such Additional Properties,
together with related certifications requested by Bank, which reports, data,
title information, opinions, supplemental information and certifications shall
be substantially in the form, content, quality, quantity and scope as requested
by Bank with respect to Properties previously submitted for inclusion and
included in the Credit Borrowing Base (except for differences in the nature,
location and other factors reasonably deemed relevant to Bank), Bank will
announce, within 45 days of its receipt of all requested materials (i) whether
or not the Additional Properties are acceptable for inclusion in the Credit
Borrowing Base and (ii) if so acceptable, the Credit Borrowing Base
attributable thereto, and the conditions precedent required by Bank for
including such Additional Properties in the Credit Borrowing Base. Assuming
that the submitted Additional Properties are acceptable to Bank for inclusion
in the Credit Borrowing Base, and the Borrower desires to so include such
Properties in the Credit Borrowing Base determined therefor by Bank, then upon
completion of the conditions specified by Bank for such inclusion, such
Properties will become Mortgaged Properties for all intents and purposes of
this Agreement and the other Loan Documents, and the Credit Borrowing Base and
Credit Borrowing Base Reduction Amount will be accordingly adjusted. All
reasonable expenses incurred by or on behalf of Bank in connection with such
Additional Properties, whether or not such Additional Properties are included
in the Credit Borrowing Base, shall be for the account of the Borrower.

(e) If the Total Credit Principal at any time exceeds (i) the
Credit Borrowing Base as determined by Bank, in its sole discretion, or (ii)
the Credit Commitment, whichever is then less, Borrower shall promptly, and in
any event prior to the tenth (10th) Business Day to occur after such
determination or occurrence, as applicable, prepay the principal of the Credit
Note in an aggregate amount at least equal to such excess; provided however, if
the Total Credit Principal at any time exceeds the Credit Borrowing Base when
the Credit Borrowing Base is equal to or less than the Credit Commitment, as an
alternative to the Borrower's obligation to prepay as above provided in this
Section 2.6(e), Borrower may grant to Bank a perfected, first priority Lien on
additional Oil and Gas Properties and the production therefrom having value
satisfactory to Bank, in its sole discretion, in order to increase the Credit
Borrowing Base by the amount of such excess.

(f) Each Lien on Oil and Gas Properties (and Related
Properties, including, without limitation, the Property Instruments) to be
included in the Credit Borrowing Base shall be granted by Borrower to Bank
pursuant to the Security Documents, and accompanied by title opinions and/or
other evidence of title, each of which shall be in form, scope and substance
reasonably satisfactory to Bank. In addition, Borrower shall deliver to Bank
such other information, data, and reports in

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<PAGE> 26
respect of any additional Oil and Gas Properties to be included in the Credit
Borrowing Base and the reserves and production related thereto, as Bank may
from time to time reasonably request.

ARTICLE III

Additional Fees

Section 3.1 Commitment Fee: Reduction or Termination of Credit
Commitment. The Borrower agrees to pay to Bank a commitment fee on the average
daily unused portion of the lesser of the Credit Borrowing Base and the Credit
Commitment, from and including the Closing Date, to and including the Credit
Maturity Date, at the rate of one-half of one percent (1/2 of 1%) per annum
based on a 365 or 366 day year, as the case may be, and the actual number of
days elapsed, payable on each Interest Payment Date, commencing with the first
Interest Payment Date to occur after the Closing Date, and on the Credit
Maturity Date. Borrower shall have the right at any time to terminate in whole
or from time to time to reduce irrevocably in part the Credit Commitment upon
at least three (3) Business Days prior notice to Bank specifying the effective
date thereof, whether a termination or reduction is being made, and the amount
of any partial reduction, provided that (i) each partial reduction shall be in
the amount of $100,000 or an integral multiple thereof, (ii) Borrower shall
simultaneously prepay the Credit Note by the amount by which the unpaid
principal balance of the Credit Advances exceeds the Credit Commitment (after
giving effect to such notice) plus accrued and unpaid interest on the principal
amount so prepaid, and (iii) after giving effect to such reduction or
termination, the Total Credit Principal does not exceed the Credit Commitment.

Section 3.2 Facility Fee. Borrower agrees to pay Bank (i) on the
Closing Date, a facility fee of $75,000 and (ii) on each date subsequent to the
Closing Date that Bank announces any increase in the Credit Borrowing Base to
an amount greater than $10,000,000, a facility fee equal to 3/8% of the amount
by which such announced increased Credit Borrowing Base exceeds the amount of
the highest Credit Borrowing Base which was in effect during the period
commencing on the Closing Date and ending on the date of such announced
increase.

Section 3.3 Engineering Fee. Borrower agrees to pay Bank, in
advance and on demand, an engineering fee in the amount of $3,000 for each of
the first four engineering reviews performed by Bank in the first year and
$3,750 for each of the first four engineering reviews performed by Bank in each
year thereafter, so long as the Credit Commitment or any Advance is
outstanding, and until full and final payment of the Obligations. In any such
year in which there are more than four Credit Borrowing Base Redeterminations,
Borrower agrees to pay Bank an engineering fee in the amount of $10,000 in
advance and on demand, for each redetermination in excess of four. The
semi-annual Credit Borrowing Base Redeterminations provided for in this
Agreement shall be counted in each year as two of the redeterminations referred
to in this Section 3.3. Notwithstanding anything contained herein to the
contrary, if the reserve reports supplied to Bank for purposes of performing

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<PAGE> 27
an engineering review are not prepared by an independent third-party
engineering firm acceptable to Bank (whose acceptance will not be unreasonably
withheld), then Borrower agrees to pay Bank an engineering fee equal to Bank's
actual costs incurred for such engineering review, and such costs shall not be
limited by this section.

ARTICLE IV

Payments

Section 4.1 Method of Payment. All payments of principal,
interest and other amounts to be made by Borrower hereunder, under the Credit
Note and under any other Loan Document shall be made to Bank at its Principal
Office in Dollars and in immediately available funds, no later than 2:00 p.m.,
Dallas, Texas time on the date on which such payment shall become due (each
such payment made after such time on such due date to be deemed to have been
made on the next succeeding Business Day). Without relieving or diminishing
the obligation of Borrower to direct and to make all payments of the
Obligations when due, in addition to and cumulative of Borrower's payment
obligations, Borrower irrevocably authorizes Bank to effectuate any and all
payments of the Obligations, when due, pursuant to each Debit Authorization
signed and delivered by Borrower to Bank, and Bank shall have no liability to
Borrower or any other Person for taking such actions or refraining from taking
such actions. Whenever any payment hereunder, under the Credit Note or under
any other Loan Document shall be stated to be due on a day that is not a
Business Day, such payment may be made on the next succeeding Business Day and
interest or commitment fee, as the case may be, shall continue to accrue during
such extension. Subject to Section 4.3, Borrower shall, at the time of making
each such payment hereunder, under the Credit Note and under any Loan Document,
specify to Bank the Advances or other sums payable by Borrower hereunder, under
the Credit Note,or under any Loan Document to which such payment is to be
applied (and in the event that Borrower fails to so specify, or if an Event of
Default has occurred and is continuing, Bank may apply such payment as it may
elect in its sole discretion).

Section 4.2 Prepayment. Borrower may, upon notice to Bank prior
to 10:00 a.m. on the same Business Day in the case of Prime Rate Advances, at
least two (2) Business Days prior notice to Bank in the case of CD Advances,
and two (2) Business Days prior notice to Bank in the case of LIBOR Advances
prepay the Credit Note in whole at any time or from time to time in part
without premium or penalty but with accrued interest to the date of prepayment
on the amount so prepaid; provided that the (i) Fixed Rate Advances may be
prepaid only on the last day of the Interest Period for such Advances, and (ii)
each partial prepayment shall be in the principal amount of $100,000 or an
integral multiple thereof.

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Section 4.3 General Application. All payments made on principal
or interest with respect to repayment of the Total Credit Principal shall be
applied first to the accrued interest then due and the remainder, if any, to
principal or other similar amount then due.

Section 4.4 Computation of Interest. Interest on Fixed Rate
Advances shall be computed on the basis of a year of 360 days and the actual
number of days elapsed (including the first day but excluding the last day)
occurring in the period for which payable, unless such calculation would result
in a usurious rate or amount of interest under Applicable Law, in which case
interest shall be calculated on the basis of a year of 365 or 366 days, as the
case may be, and the actual number of days elapsed (including the first day but
excluding the last day) occurring in the period for which payable. Interest on
Prime Rate Advances shall be computed on the basis of a year of 365 or 366
days, as the case may be, and the actual number of days elapsed (including the
first day but excluding the last day) occurring in the period for which
payable.

ARTICLE V

Yield Protection and Illegality

Section 5.1 Additional Costs.

(a) Borrower shall pay directly to Bank from time to time such
amounts as Bank may determine to be necessary to compensate it for any costs
incurred by Bank which Bank determines are attributable to its making or
maintaining of any Fixed Rate Advances hereunder or its obligation to make any
of such Advances hereunder, or any reduction in any amount receivable by Bank
hereunder in respect of any such Advances or such obligation (such increases in
costs and reductions in amounts receivable being herein called "Additional
Costs"), resulting from any Regulatory Change which:

(i) changes the basis of taxation of any amounts
payable to Bank under this Agreement or the Credit Note in
respect of any of such Advances (other than taxes imposed
on the overall net income of Bank for any of such Advances
by the jurisdiction in which Bank has its principal
office);

(ii) imposes or modifies any reserve, special
deposit, minimum capital, capital ratio or similar
requirement relating to any extensions of credit or other
assets of, or any deposits with or other liabilities or
commitments of, Bank (including any of such Advances or any
deposits referred to in the definition of LIBO Rate or CD
Rate in Section 1.1 hereof); or

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<PAGE> 29
(iii) imposes any other condition or charge
affecting this Agreement or any of such extensions of
credit or liabilities or commitments.

Bank will notify Borrower of any event occurring after the date of this
Agreement which will entitle Bank to compensation pursuant to this Section as
promptly as practicable after it obtains knowledge thereof and determines to
request such compensation. Bank will furnish to Borrower a certificate setting
forth the basis and the amount of each request of Bank for compensation under
this Section. If Bank requests compensation from Borrower under this Section,
Borrower may, by notice to Bank, suspend the obligation of Bank to make
additional Advances of the Type with respect to which such compensation is
requested until the Regulatory Change giving rise to such request ceases to be
in effect (in which case the provisions of Section 5.4 hereof shall be
applicable).

(b) Without limiting the effect of the foregoing provisions of
this Section, in the event that, by reason of any Regulatory Change, Bank
either (i) incurs Additional Costs based on or measured by the excess above a
specified level of the amount of a category of deposits or other liabilities of
Bank which includes deposits by reference to which the interest rate on LIBOR
Advances or CD Advances is determined as provided in this Agreement or a
category of extensions of credit or other assets of Bank which includes LIBOR
Advances or CD Advances or (ii) becomes subject to restrictions on the amount
of such a category of liabilities or assets which it may hold, then, if Bank so
elects by notice to Borrower the obligation of Bank to make additional Advances
of such Type hereunder shall be suspended until such Regulatory Change ceases
to be in effect (in which case the provisions of Section 5.4 hereof shall be
applicable).

(c) Determinations and allocations by Bank for purposes of this
Section of the effect of any Regulatory Change on its costs of maintaining its
obligations to make Advances or of making or maintaining Advances or on amounts
receivable by it in respect of Advances, and of the additional amounts required
to compensate Bank in respect of any Additional Costs, shall, in the absence of
manifest error, be conclusive and binding.

Section 5.2 Limitation on Types of Advances. Anything herein to
the contrary notwithstanding, if with respect to any Fixed Rate Advances for
any Interest Period therefor:

(a) Bank determines (which determination shall, absent
manifest error, be conclusive and binding) that quotations of interest
rates for the relevant deposits referred to in the definition of LIBO
Rate or CD Rate in Section 1.1 hereof are not being provided in the
relative amounts or for the relative maturities for purposes of
determining the rate of interest for such Advances as provided in this
Agreement; or

(b) Bank determines (which determination shall, absent
manifest error, be conclusive) that the relevant rates of interest
referred to in the definition of "LIBO Rate" or

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<PAGE> 30
"CD Rate" in Section 1.1 hereof on the basis of which the rate of
interest for such Advances for such Interest Period is to be
determined do not accurately reflect the cost to the Bank of making or
maintaining such Advances for such Interest Period;

then Bank shall give Borrower notice thereof no later than 12:00 p.m., Houston,
Texas time on the Business Day following the day of receipt of Bank of a
properly completed Advance Request Form, which notice shall specify the
relevant Type of Advances and the relevant amounts or periods, and so long as
such condition remains in effect, Bank shall be under no obligation to make
additional Advances of such Type or to convert Advances of any other Type into
Advances of such Type and the Borrower shall, on the last day(s) of the then
current Interest Period(s) for the outstanding Advances of the affected Type,
either prepay such Advances or convert such Advances into another Type of
Advance in accordance with the terms of this Agreement.

Section 5.3 Illegality. Notwithstanding any other provision of
this Agreement, in the event that it becomes unlawful for Bank to (i) honor its
obligation to make Fixed Rate Advances hereunder or (ii) maintain Fixed Rate
Advances hereunder, then Bank shall promptly notify Borrower thereof and Bank's
obligation to make or continue the affected Type of Advances and to convert
other Types of Advances into the affected Type of Advances hereunder shall be
suspended until such time as Bank may again make and maintain such affected
type of Advances (in which case the provisions of Section 5.4 hereof shall be
applicable).

Section 5.4 Substitute Prime Rate Advances. If the obligation of
Bank to make, convert and/or continue either Type of Fixed Rate Advances shall
be suspended pursuant to Section 5.1, 5.2 or 5.3 hereof (Advances of such Type
being herein called "Affected Advances" and such Type being herein called the
"Affected Type"), all Advances that would be otherwise made, converted and/or
continued by Bank as Advances of the Affected Type shall be made, converted
and/or continued instead as Prime Rate Advances or, if timely requested as
herein provided, Advances that are not Affected Advances or of an Affected Type
(and, if an event referred to in Section 5.1 or 5.3 hereof has occurred and
Bank so requests by notice to Borrower, all Affected Advances of Bank then
outstanding shall be automatically converted into Prime Rate Advances or, if
timely requested as herein provided, Advances that are not Affected Advances or
of an Affected Type, on the date specified by Bank in such notice) and, to the
extent that Affected Advances are so made as (or converted into) Prime Rate
Advances or Advances that are not Affected Advances, all payments of principal
which would otherwise be applied to Bank's Affected Advances shall be applied
instead to its Prime Rate Advances or Advances that are not Affected Advances
or of an Affected Type, as applicable.

Section 5.5 Compensation. Borrower shall pay to Bank, upon the
request of Bank, such amount or amounts as shall be sufficient (in the
reasonable opinion of Bank) to compensate it for any loss, cost, or expense
incurred by it as a result of:

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(a) Any payment, prepayment or conversion of a Fixed Rate
Advance on a date other than the last day of an Interest Period for
such Advance; or

(b) Any failure by Borrower to borrow, convert, or prepay
a Fixed Rate Advance on the date for such borrowing, conversion, or
prepayment, specified in the relevant notice of borrowing, prepayment,
or conversion under this Agreement.

Without Limiting the effect of the preceding sentence, such compensation shall
include an amount equal to the excess, if any, of (i) the amount of interest
which otherwise would have accrued on the principal amount so paid or converted
or not borrowed for the period from the date of such payment, conversion, or
failure to borrow to the last day of the Interest Period for such Advance (or,
in the case of a failure to borrow, the Interest Period for such Advance which
would have commenced on the date specified for such borrowing) at the
applicable rate of interest for such Advance provided for herein over (ii) the
interest component of the amount Bank would have bid in the London interbank
market (if such Advance is a LIBOR Advance) or the certificate of deposit
market (if such Advance is a CD Advance) for Dollar deposits of leading banks
and amounts comparable to such principal amount and with maturities comparable
to such period.

Section 5.6 Additional Compliance. To the extent not covered by,
and without duplication of Section 5.1, in addition thereto and without
limitation as to the Type of any Advance or financial accommodation extended,
Borrower shall pay directly to Bank from time to time on request such amount as
Bank may determine to be necessary to compensate Bank for any costs which it
determines are attributable to the maintenance by Bank, pursuant to any law or
regulation or any interpretation, directive or request (whether or not having
the force of law) of any court or governmental or monetary authority, following
any Regulatory Change, of reserves, minimum capital, capital ratio or capital
with respect to the Credit Commitment, or the Advances (such compensation to
include, without limitation, an amount equal to any reduction of the rate of
return on assets or equity of Bank to a level below that which Bank could have
achieved but for such law, regulation, interpretation, directive or request).
Bank will notify Borrower that Bank is entitled to compensation pursuant to
this Section 5.6 as promptly as practicable after Bank determines to request
such compensation.

ARTICLE VI

Security

Section 6.1 Collateral. To secure the full and complete payment
and performance of the Obligations and the covenants, agreements and
obligations in the Loan Documents, Borrower shall execute and deliver or cause
to be executed and delivered the Security Documents creating first and prior
Liens and security interests in the Property generally described below (which
Property, together

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<PAGE> 32
with any and all other Property, now owned or existing or hereafter acquired or
arising, of Borrower or any other Person, which may now or hereafter secure the
Obligations or any part thereof and/or the performance of Borrower's
obligations, agreement and covenants to Bank, each as more fully described in
the respective Security Documents now or hereafter executed, are herein
referred to as the Collateral):

(a) all Mortgaged Properties now owned or hereinafter acquired; and

(b) all of Borrower's rights, title and interest in and
to all accounts, accounts receivable, inventory, chattel paper,
documents, instruments, securities and general intangibles, and
proceeds thereof attributable to the Mortgaged Properties.

Borrower shall execute and cause to be executed such further documents and
instruments, including without limitation, Uniform Commercial Code financing
statements, as Bank, in its sole discretion, deems necessary or desirable to
evidence and perfect its Liens in the Collateral.

Section 6.2 Setoff. Bank shall have the right to set off and
apply against the Obligations in such manner as Bank may determine, at any time
and without notice to Borrower or any other Person, any and all deposits
(general or special, time or demand, provisional or final) or other sums at any
time credited by or owing from Bank to Borrower upon the occurrence and during
the continuance of a Default described in Section 11.1(f) or an Event of
Default, whether or not the Obligations are then due. As further security for
the Obligations, Borrower hereby grants to Bank a security interest in all
money, instruments, and other Property now or hereafter held by Bank,
including, without limitation, Property held in safekeeping. In addition to
Bank's right of setoff and as further security for the Obligations, Borrower
hereby grants to Bank a security interest in all deposits (general or special,
time or demand, provisional or final) and other accounts now or hereafter on
deposit with or held by Bank and all other sums at any time credited by or
owing from Bank to Borrower. The rights and remedies of Bank hereunder are in
addition to other rights and remedies (including, without limitation, other
rights of setoff) which Bank may have.

Section 6.3 Guaranty. To secure further the full and complete
payment of the Obligations, Borrower shall cause the Guaranty to be duly
executed and delivered to Bank.

ARTICLE VII

Conditions Precedent

Section 7.1 Initial Advance. Subject to the terms and conditions
of this Agreement, the obligation of Bank to make the initial Advance is
conditioned on Bank receiving on or before the day of such Advance all of the
following, each dated (unless otherwise indicated) the date hereof, in form

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<PAGE> 33

and substance satisfactory to Bank and appropriately executed and
acknowledged and in sufficient executed counterparts for recording purposes when
applicable:

(a) Resolutions. Resolutions of the Board of Directors
of Borrower, KCS and Proliq (each a "Corporate Entity" ) certified by
its Secretary or an Assistant Secretary which authorize the execution,
delivery, and performance by such Corporate Entity, in each relevant
capacity, of each of the Loan Documents to which such Corporate Entity
is or is to be a party;

(b) Incumbency Certificate. A certificate of incumbency
certified by the Secretary or an Assistant Secretary of each Corporate
Entity certifying the names of the officers of such Corporate Entity
authorized to sign each of the Loan Documents to which such Corporate
Entity is or is to be a party (including the certificate contemplated
herein) together with specimen signatures of such officers;

(c) Charter. The articles or certificate, as applicable,
of incorporation of each Corporate Entity certified by the Secretary
of State of the respective jurisdictions of incorporation and dated
within ten (10) days prior to the date of the initial Advance;

(d) Bylaws. The bylaws of each Corporate Entity
certified by the Secretary or an Assistant Secretary of such Corporate
Entity;

(e) Governmental Certificates. Certificates of the
appropriate government officials of (i) the state of incorporation of
each Corporate Entity as to the existence and good standing of each
such Corporate Entity, and (ii) each state in which each of the
Corporate Entities is required to qualify to conduct business as a
foreign corporation as to such foreign qualification and if not
included within such foreign qualification certificate, as to good
standing, valid existence and tax payment/filing status, including,
without limitation, such certificates from the Secretary of State of
Texas and the Comptroller of Public Accounts of the State of Texas
with respect to each Corporate Entity, each such certificate referred
to in the preceding clauses (i) and (ii) dated within a time period
satisfactory to Bank;

(f) Credit Note. The Credit Note duly completed and
executed by Borrower;

(g) Security Documents. Each Security Document listed in
Annex C attached hereto, duly completed, executed and delivered by
Borrower properly filed and recorded;

(h) Production Purchasers; Letter Transfer Orders. A
listing set forth in Schedule 15 hereto of all current Purchasers,
designating therein the Mortgaged Properties from which

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<PAGE> 34
such Purchasers purchase production, and the mailing address of each
such Purchaser. Letter Transfer Orders executed by Borrower for those
Purchasers listed in Schedule 15;

(i) Opinion of Counsel. A favorable opinion of Mayor,
Day, Caldwell & Keeton, L.L.P., Texas legal counsel to Borrower, KCS
and Proliq, as of the Closing Date and a favorable opinion of Orloff,
Lowenbach, Stifelman & Siegel, P.A., general legal counsel to
Borrower, KCS and Proliq, as of the Closing Date;

(j) Fees and Expenses. (i) Payment of the fees required
by Sections 3.2 and 3.3 and (ii) payment of the costs and expenses
required by Section 12.1 in connection with the preparation,
negotiation and execution of this Agreement and the other Loan
Documents, including but not limited to, the fees and disbursement
expenses of legal counsel to Bank;

(k) Title Opinions and Information. Such title
information regarding the Mortgaged Properties which is reasonably
requested by Bank, each of the foregoing setting forth the status of
title to the Mortgaged Properties, which status shall be satisfactory
to Bank, and otherwise being in form, scope and substance reasonably
satisfactory to Bank;

(l) Production Certificate. An officer's certificate of
Borrower that the Oil and Gas Properties known as West Cameron 342,
West Cameron 359 and Mustang Island 783 have produced marketable
quantities of natural gas for a period of time satisfactory to Bank,
not to exceed 30 consecutive days, at rates consistent with the
projection outlined in the July 1, 1994 Ryder Scott Reserve Report
covering such properties;

(m) Officer's Certificate. An officer's certificate of
Borrower, KCS and Proliq, each in form and substance satisfactory to
Bank, duly and properly executed on behalf of Borrower and KCS, by an
executive officer of each of them, and dated as of the Closing Date;
and

(n) Other Documents. Such other documents, instruments,
opinions, reports, certifications and agreements as Bank or its legal
counsel may reasonably request.

Section 7.2 All Advances. The obligation of Bank to make any
Advance (including the initial Advance) is subject to the following additional
conditions precedent:

(a) Advance Request Form. For any Advance to be made
Bank shall have received, in accordance with Section 2.3, a completed
Advance Request Form, executed by authorized officers of Borrower, all
of the statements in which shall be true and correct on and as of the
date thereof;

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(b) No Material Adverse Change. No material adverse
change shall have occurred in the financial or operating condition of
Borrower, KCS or Proliq;

(d) Representations. The representations and warranties
(i) in Article III of the Guaranty, in Article VIII hereof and in each
of the other Loan Documents, and (ii) in each update, modification or
supplement thereof as of a subsequent date, shall be true on and as,
of and following the date of such Advance except to the extent than
any such representation or warranty was made as of a specific date;

(e) If Total Credit Principal is Zero. Until the Credit
Maturity Date and so long as the Credit Commitment shall be in effect,
upon each request for an Advance (other than the initial Advance) at a
time when the Total Credit Principal as to the Advance or Advances
previously made by Bank to Borrower is zero, Borrower shall deliver to
Bank such certifications, instruments documents, opinions and
information as Bank shall reasonably request to assure Bank that
neither Borrower, nor any other Person, has incurred, created, assumed
or permitted to exist any Lien against, on, or with respect to, any
Collateral, other than Excepted Liens.

ARTICLE VIII

Representations and Warranties

To induce Bank to enter into this Agreement, Borrower represents and
warrants to Bank that:

Section 8.1 Corporate Existence and Authority. Borrower (i) is a
corporation duly organized, validly existing, and in good standing under the
laws of the jurisdiction of its incorporation; (ii) has all legal right and
requisite corporate power and authority (A) to own and operate its assets and
Properties and carry on its business as now being or as proposed to be
conducted, (B) to enter into, execute, deliver and perform its obligations
pursuant to the Loan Documents to which it is or may become a party and (C) to
grant the Liens, to incur the indebtedness and liabilities and to indemnify as
provided in the Loan Documents to which it is or may become a party; and (iii)
is qualified to do business in all jurisdictions in which the nature of its
business makes such qualification necessary and where failure to so qualify
would have a Material Adverse Effect on it.

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<PAGE> 36
Section 8.2 Authorization. The execution, delivery and
performance by Borrower of this Agreement and the other Loan Documents to
which it is or may become a party have been duly authorized by all requisite
action on its part.

Section 8.3 Enforceability. Each Loan Document has been duly
executed and delivered and constitutes the legal, valid and binding obligations
of Borrower enforceable against it in accordance with their respective terms,
except as limited by bankruptcy, insolvency or similar laws affecting generally
the rights of creditors and general principles of equity, whether applied by a
court of law or equity.

Section 8.4 No Breach. Neither the execution and delivery of
this Agreement, the Credit Note or the other Loan Documents, nor the compliance
with, or performance of, the terms and provisions hereof or thereof, does or
will (i) conflict with, or result in or constitute a breach, default or
violation of, or require any consent under, (A) the charter or by-laws of
Borrower, or (B) any applicable law, rule, or regulation, or any order, writ,
injunction or decree of any court, governmental authority or arbitrator or
agency, or (C) (1) any (a) material agreement or instrument, or (b) agreement
or instrument that, when aggregated with other such agreements, is material to
which Borrower or its Properties (other than Collateral and other Properties,
which other properties, individually or in the aggregate, have an
inconsequential value) is bound or to which Borrower or its Properties is
subject, or (2) any agreement or instrument by which any Collateral is bound or
to which any Collateral is subject, or (ii) result in the creation or
imposition of any Lien (except Liens in favor of Bank) upon any of the revenues
or Property of Borrower pursuant to the terms of any agreement or instrument.

Section 8.5 Approvals. No authorization, approval, or consent
of, and no filing or registration with, any court, Governmental Authority, or
any third party is required or will be necessary for the execution, delivery,
or performance by Borrower of this Agreement and the other Loan Documents to
which it is or may become a party or for the validity or enforceability thereof
or, if required or necessary, has been duly obtained or, as to third party
consents, waived.

Section 8.6 Litigation and Judgments. Except as disclosed in
Schedule 3 hereto, (i) there is no action, suit, investigation or proceeding
before any court, administrative board, governmental authority, or arbitrator
pending, or to the knowledge of Borrower, threatened, against or affecting (A)
any Collateral, (B) Borrower's ability to enter into, execute, deliver or
perform its obligations under the Loan Documents, (C) Borrower which, if
adversely determined, could reasonably be expected to result in any judgment or
liability, individually or when aggregated with all other such judgments or
liabilities, which equals or exceeds $500,000, which is not fully covered by
insurance (exclusive of any deductible amount related to such insurance, which
deductible amount is customary for Persons engaged in similar businesses), or
(D) Borrower, which if adversely determined, could reasonably be expected to
result in a Material Adverse Effect on Borrower, and (ii) there are no

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<PAGE> 37
outstanding judgments or similar claims (A) against any Collateral, or (B)
against Borrower or any of its Properties, of a nature or type described in
any of the clauses (B) through (D) in the preceding clause (i).

Section 8.7 Rights in Properties; Liens.

(a) Except for such matters identified in Schedule 6, and as to
each matter disclosed therein which Bank has expressly waived or required
curative action, and except for minor irregularities in title that do not
materially and adversely affect any of the Borrower's title to any of the
Collateral, Borrower has good and indefeasible title to the Collateral, free
and clear of all Liens except as permitted in Section 10.2 (the "Excepted
Liens"). Except as identified in Schedule 6, after giving full effect to the
Excepted Liens, and except for items or discrepancies not significant to the
Collateral affected thereby, Borrower will own the net interests in production
attributable to the wells and units reflected in the Reports which are
Mortgaged Properties and the ownership of such Properties shall not in any
material respect obligate Borrower to bear any costs and expenses relating to
the maintenance, development and operations of each such Property except upon
Borrower's acquisition of an additional interest in the Mortgaged Properties
through foreclosure. Further, upon delivery of each Reserve Report and
Alternate Reserve Report furnished to Bank pursuant to Section 9.13, the
statements made in the preceding sentence with respect to the Mortgaged
Properties shall be true with respect to such furnished reports. All
information furnished by or on behalf of Borrower for utilization in preparing
the Reports is true and correct in all material respects as of the date thereof
and, as to the Initial Reserve Report, as of the date of the initial Advance,
and as of such dates the estimates of net proved oil and gas reserves set forth
in the Reports are in the aggregate reasonable using generally accepted
petroleum engineering and evaluation principles.

(b) Each Security Document creates a legal, valid, binding and
enforceable Lien in the Properties covered thereby, and, with respect to
personal property described in the Security Documents, upon the proper filing,
recording and indexing of financing statements in the respective Offices of the
Secretaries of State of the States of Texas, Alabama and Louisiana and, with
respect to accounts and general intangibles of Borrower, the Office of the
Secretary of State of New Jersey and, with respect to all other Property
described in the Security Documents, upon the proper filing, recording and
indexing of the appropriate Oil and Gas Mortgage in the jurisdiction where the
Property is located such Liens will be perfected, prior, superior and effective
as against all other Persons and will secure the Obligations, and, except for
Excepted Liens of an inconsequential amount and nature and Excepted Liens
referred to in Section 10.2(h) neither Borrower nor any other Person has
created or permitted to be created any other Liens in such Property, or has
executed, authorized or permitted the filing of any financing statement, deed
of trust, mortgage, lien affidavit or other Lien filing covering any such
Property in any jurisdiction, except in favor of Bank pursuant to this
Agreement, and none are on file.

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Section 8.8 Compliance with Law: Restrictions. Except as to
environmental matters addressed in Section 8.19, Borrower is in compliance with
all Governmental Requirements that are applicable to it or any of its
Properties, other than such Governmental Requirements the failure with which to
comply, individually or in the aggregate, could reasonably be expected to cause
no more than an inconsequential adverse effect. Except as to environmental
matters addressed in Section 8.19, neither Borrower nor any of its Properties
is a party or subject to any contract, agreement or undertaking, or any
Governmental Requirement, or other restriction of any kind, which (i) adversely
affects its business or operations or its Property, other than of an
inconsequential nature, or (ii) impairs its ability to perform and comply or
prohibits it from performing and complying, punctually and completely with the
terms and provisions of any Loan Document to which it is a party, or by which
it or any of its Property is bound.

Section 8.9 Investment Company Act. Borrower is not an
investment company or a company controlled by an investment company, within the
meaning of the Investment Company Act of 1940, as amended.

Section 8.10 Public Utility Holding Company Act. Borrower is not
a holding company or a subsidiary company of a holding company or an affiliate
of a holding company or a subsidiary company of a holding company or a public
utility within the meaning of the Public Utility Holding Company Act of 1935,
as amended.

Section 8.11 Subsidiaries. Borrower has no Subsidiaries. Borrower
is not a general partner or joint venturer and has no partnership or joint
venture interests in any Person.

Section 8.12 Financial Statements. Audited consolidated financial
statements and unaudited consolidating financial statements of KCS and its
Subsidiaries as at and for the fiscal year ended September 30, 1994 have been
delivered to Bank. Such financial statements have been prepared in accordance
with GAAP, and fairly present, on a consolidated basis, the financial condition
of KCS and its Subsidiaries as of the respective dates indicated therein and
the results of operations for the respective periods indicated therein.
Borrower has no material contingent liabilities, liabilities for taxes,
material forward or long-term commitments, or unrealized or anticipated losses
from any unfavorable commitments not reflected in such financial statements.
There has been no change in the condition, financial or otherwise, or
operations of Borrower since the effective date of the most recent financial
statements referred to in this Section which would have a Material Adverse
Effect on Borrower.

Section 8.13 Debt Note Payable Schedule. Borrower has no Debt,
except as permitted in Section 10.1 hereof.

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Section 8.14 Default. Borrower is not in default of, and no event
has occurred which, with the lapse of time or giving of notice, or both, could
result in a default of any charter document or bylaws of Borrower, or, pursuant
to which the obligation of Borrower thereunder, or the obligation secured
thereby, exceeds $100,000, any credit agreement, any indenture, mortgage,
security agreement, or any other agreement or obligation to which Borrower is a
party or by which Borrower's Properties may be bound.

Section 8.15 Taxes. Except for taxes being contested in good
faith by appropriate proceedings diligently pursued, and for which adequate
reserves have been established, as same are shown in Schedule 7 hereof,
Borrower has filed all tax returns and reports (federal, state and local)
required to be filed, including all income, franchise, employment, property,
and sales taxes, and has paid all of its tax liabilities, franchise fees,
annual reports and the like, and knows of no pending investigation by any
taxing authority or of any pending but unassessed tax liability. The charges,
accruals and reserves on the books of Borrower in respect to taxes and other
governmental charges are accurately stated and adequate.

Section 8.16 Place of Business; Names; Debit Authorizations. The
(i) place of business of Borrower, or, if Borrower has more than one place of
business, its chief executive office, and (ii) place where Borrower keeps its
books and records, is located at the address of Borrower set forth below its
name on the signature pages hereof under the designation Principal Place of
Business . Except as set forth in Schedule 8 hereto, Borrower does not operate
or conduct business under a tradename, division name, assumed name or name
other than as currently set forth in its charter document as filed in its
jurisdiction of incorporation.

Section 8.17 Use of Proceeds: Margin Securities. The proceeds of
the Advances shall be used by Borrower solely as provided in Section 2.5.
Borrower is not engaged principally, or as one of its important activities, in
the business of extending credit for the purpose of purchasing or carrying
margin stock (within the meaning of Regulations G, T, U, or X of the Board of
Governors of the Federal Reserve System), and no part of the proceeds of any
extension of credit under this Agreement will be used to purchase or carry any
such margin stock or to extend credit to others for the purpose of purchasing
or carrying margin stock. Neither Borrower nor any Person acting on its behalf
has taken any action that might cause the transactions contemplated by this
Agreement or the Credit Note to violate Regulations G, T, U, or X or to violate
the Securities Exchange Act of 1934, as amended.

Section 8.18 Concentration Account; Certain Balances.

(a) Borrower advises Bank that (i) KCS requires Borrower to
transfer, on a periodic basis, all of Borrower's cash receipts and other funds
to the Concentration Account, (ii) Borrower maintains records regarding the
amounts transferred by Borrower to the Concentration Account, and the amounts
transferred from the Concentration Account to Borrower's Disbursement Account,
and

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<PAGE> 40
(iii) as Borrower requires or requests funds for the payment of its obligations
and indebtedness, KCS will transfer, from the Concentration Account, such funds
to Borrower's Disbursement Account. The description of the cash management
program described in the preceding sentence is accurate and correct. Borrower
acknowledges and agrees that the establishment and maintenance of such
accounts, amounts and cash management program do not constitute a disposition
authorized by Bank which would release or impair Bank's Lien in the accounts or
general intangibles of Borrower, or other Collateral, and the proceeds thereof,
or with respect to any of the foregoing.

(b) There is only one Concentration Account, and it is
maintained with a Qualified Bank. No amounts transferred by Borrower to the
Concentration Account have been disbursed therefrom in violation of Section
10.12. In addition, no amounts have been disbursed from Borrower's
Disbursement Account other than amounts in payment of obligations and
indebtedness owed by such Borrower.

Section 8.19 Environmental Matters.

(a) Except as disclosed in Schedule 14, and as to which Bank
has waived, Borrower and its Properties, assets, and operations are in full
compliance with all applicable Environmental Laws. Except as described in
Schedule 14, and as to which Bank has waived, Borrower is not aware of, nor has
it received notice of, any past, present, or future conditions, events,
activities, practices, or incidents which would interfere with or prevent the
compliance or continued compliance of Borrower with any applicable
Environmental Laws.

(b) Except as disclosed in Schedule 14, and as to which Bank
has waived, Borrower has obtained all permits, licenses, and authorizations
that are required under applicable Environmental Laws, and which the failure to
obtain would have (i) an adverse effect (other than of an inconsequential
nature) on the operations or value of, or Borrower's interest in, any of the
Mortgaged Properties, or (ii) a Material Adverse Effect with respect to
Borrower.

(c) Except as disclosed in Schedule 14, and as to which Bank
has waived, no hazardous substances exist on, about, or within or have been
used, generated, stored, transported, disposed of on, or released from any of
the Properties or assets of Borrower except in accordance with applicable
Environmental Laws. Borrower intends to make use of its Properties and assets
in a manner that will not result in the violation of any applicable
Environmental Law with respect to the use, generation, storage, transportation,
accumulation, disposal, or release of any hazardous substance on, in, or from
any such Properties or assets.

(d) Except as disclosed in Schedule 14, and as to which Bank
has waived, there is no action, suit, proceeding, investigation, or inquiry
before any court, administrative agency, or other Governmental Authority
pending or, to the knowledge of Borrower, threatened against Borrower or

35
<PAGE> 41
its Properties arising under CERCLA or any other applicable Environmental Law.
Except as disclosed in Schedule 14, and as to which Bank has waived Borrower
has (i) no liability for remedial action under CERCLA or any other similar
Environmental Law which, to its knowledge after having made reasonable inquiry,
has been imposed or assessed by any Governmental Authority or other Person,
(ii) not received any pending request for information by any Governmental
Authority with respect to potential liability for remedial action under CERCLA
or any other applicable Environmental Law and the condition, use, or operation
of any of its Properties or assets, or (iii) not received any pending notice
from any Governmental Authority or other Person with respect to any violation
of, or liability for remedial action under, any Environmental Law.

Section 8.20 Make-up Obligations: Gas Imbalances. Except as
disclosed in Schedule 9 hereto, no portion of the Mortgaged Properties is
subject to (i) any contractual (including, without limitation, the right by a
purchaser of gas to make up gas heretofore paid for but not taken) or other
(including, without limitation, regulatory refund obligation) obligation to
deliver oil and/or gas produced from the Mortgaged Properties from and after
the date hereof to third parties for a price then or thereafter to be paid that
is less than the market value thereof (or in the case of an existing gas sales
contract, less than the full regular contract price therefor) or (ii) any
contractual or other arrangement whereby payment for production from such
Mortgaged Properties will not be received contemporaneously (i.e., in the case
of oil, not in excess of 30 days after delivery, and in the case of gas, not in
excess of 60 days after delivery) with delivery. Except as disclosed in
Schedule 9 hereto, no part of the Mortgaged Properties is subject to a gas
balancing arrangement under which an imbalance exists with respect to which
imbalance Borrower is in an over-produced status and is required to (i) permit
one or more third parties to take a portion of the production attributable to
such Mortgaged Properties without payment of the full market (or in the case of
an existing production sales contract, full regular contract) price thereof,
and/or (ii) make payment in cash, in order to correct such imbalance. No
transportation imbalances of Hydrocarbons products takes or deliveries exist
with regard to any of the Mortgaged Properties except as so disclosed in
Schedule 9.

Section 8.21 Payments by Purchasers of Production. All proceeds
from the sale of any Borrower's interest in Hydrocarbon production from the
Mortgaged Properties are currently being paid in full to Borrower or have been
paid to Borrower, or its predecessors in interest, by the Purchaser thereof on
a timely basis and at prices and terms comparable to market prices and terms
generally available at the time such prices and terms were negotiated for oil
and gas production from producing areas situated near the Mortgaged Properties
and none of such proceeds are currently being held in suspense by such
purchaser or any other party.

Section 8.22 Claims in Respect of Mortgaged Properties. Except
for Excepted Liens (other than Excepted Liens described in Sections 10.02(d)
and (e)) and as otherwise disclosed in Schedule 11 and Schedule 6 hereto and
other matters that would not have a Material Adverse Effect on Borrower
(including, without limitation, Excepted Liens), Borrower has not received any
notice of

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<PAGE> 42
any claim or Lien, right, title, or interest in and to any of the Mortgaged
Properties from any third Person, and Borrower has no knowledge of any facts,
circumstances, or conditions which could, by lapse of time or otherwise, result
in any claim of right, title, Lien, or interest by any third Person in or to
the Mortgaged Properties or any part thereof.

Section 8.23 Federal, State and Indian Leases. With respect to
any Oil and Gas Properties included in the Mortgaged Properties which are
located on, in or relate to any Properties, on shore or offshore, which are
owned by (A) the United States of America or any agency or instrumentality
thereof, or (B) the States of Texas or Louisiana or any agency or
instrumentality thereof, or any other state, territory or other political
subdivision, or (ii) Indian Tribal Properties, Borrower (y) is duly qualified
to own and hold all such interests and (z) has obtained approval from the
applicable governmental or tribal entity of its ownership thereof to the extent
such approval is required.

Section 8.24 Disclosure. No information, statement, exhibit,
certificate, document, report, representation or warranty made or furnished to
Bank by or on behalf of Borrower in connection with, or pursuant to the
provisions of, this Agreement or any other Loan Document contained or contains
any untrue statement or misstatement of fact or omitted or omits to state any
fact necessary to make the statements herein or therein not misleading. There
is no fact known to Borrower which has a Material Adverse Effect on it, or
which Borrower reasonably anticipates might in the future have a Material
Adverse Effect on it, which has not been disclosed in writing to Bank.

Section 8.25 Fair Consideration. No Additional Extensions of
Credit. Borrower acknowledges and confirms that (i) it has received, directly
or indirectly, contemporaneously herewith fair consideration and reasonably
equivalent value in exchange for the execution, delivery and performance of all
Loan Documents to which it is a party, including, without limitation, the
incurrence by it of obligations hereunder and thereunder and the granting by it
of Liens pursuant hereto and thereto, (ii) notwithstanding any provision of any
Loan Document, Bank has not promised or agreed to make any additional advances
or loans, to increase, renew or extend any of the Obligations, the Credit
Commitment, the maturity date of the Credit Note or to forgive any Obligations
or made any other representations, promises or agreements except as expressly
set forth in the Loan Documents, and (iii) provided if and only if Bank shall
determine and announce its determination, as such determination and such
announcement are herein provided, prior to the Credit Maturity Date that the
Credit Borrowing Base equals or exceeds the Credit Commitment, the Credit
Commitment is solely the maximum amount of Total Credit Principal ever
contemplated to be outstanding hereunder, and no expression or implication is
or has been made by or on behalf of Bank (and no inference shall be made by any
Person) that it will increase the Credit Commitment or that the value of the
Mortgaged Properties or the Credit Borrowing Base existing on or after the
Closing Date will or might equal, exceed or approach a value that equals or
exceeds the Credit Commitment, such valuation at all times being evidenced by
the Credit Borrowing Base from time to time determined and announced by Bank as
each is herein provided, it being expressly and unequivocably

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<PAGE> 43
understood, acknowledged and agreed by the parties hereto that any lending
hereunder, subject to the other terms and conditions hereof, shall never exceed
the lesser of the Credit Borrowing Base from time to time in effect and the
Credit Commitment, as such Credit Borrowing Base is determined and announced by
Bank hereunder, and any difference, by any amount and at any time, between the
respective amounts of the Credit Commitment and the Credit Borrowing Base from
time to time in effect shall not be evidentiary (A) of any noncompliance by
Bank to perform its obligations pursuant to the Loan Documents, (B) that the
valuation by Bank of the Mortgaged Properties and the Credit Borrowing Base
have been made in any manner other than as herein provided, (C) that Bank's
commitment hereunder and with respect hereto to make any Advances is other
than to make Advances supported by a Credit Borrowing Base as herein determined
and announced by Bank, or (D) that the parties hereto contemplate or agree, or
have contemplated or agreed, to any transactions or other matters that are
inconsistent with, or contrary to, any of the matters expressed in, or referred
to by, this clause (iii).

Section 8.26 Location of Entity of Borrower. The Collateral is
located as described on Schedule 1.

ARTICLE IX

Positive Covenants

Borrower covenants and agrees that, as long as the Obligations or any
part thereof are outstanding and unpaid or Bank has any commitment hereunder,
Borrower will perform and observe the following positive covenants:

Section 9.1 Financial Statements. Borrower will cause KCS to
furnish to Bank all of the reports and information with respect to Borrower as
required pursuant to Section 4.1 of the Guaranty, and in the event such reports
and information are not so provided to Bank, Borrower will provide such reports
and information as required by Section 4.1 of the Guaranty to Bank, to the
extent such reports and information pertain to Borrower. In addition, as soon
as available, and in any event (A) within forty-five (45) days after the end of
each of the first three quarters of each fiscal year of Borrower, Borrower will
furnish to Bank (i) a balance sheet as of the end of such quarter and
statements of income and cash flow for such quarterly period and fiscal
year-to- date, accompanied by a certificate of the chief financial officer of
Borrower stating that such financial statements fairly present the financial
condition and results of operation of Borrower, in accordance with GAAP,
consistently applied, as at the end of, and for, such periods (subject to
normal year-end audit adjustments) and (ii) quarterly production reports
comprising the Mortgaged Properties owned by Borrower, setting forth the
calculation of Proceeds of Production for such quarterly period, which reports
shall be in form and substance satisfactory to Bank and shall be certified by
the chief financial officer of Borrower that such calculations were prepared in
accordance with the terms of this

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Agreement and based upon the books and records of Borrower, and (B) within 90
days after the end of each fiscal year of Borrower, an annual financial
statement (balance sheet and statements of income and cash flow), and an annual
production report, in form and substance, and certified in the same manner, as
the quarterly statements.

Section 9.2 Certificates; Other Information. Borrower will
furnish and cause to be furnished to Bank all of the following, and in
addition, with respect to Section 9.1, Borrower will take such action and cause
to be taken such action as set forth in Section 9.2(d):

(a) Concurrently with the delivery of each of the
financial statements referred to in Section 9.1, a certificate of the
president, any vice president or chief financial officer of Borrower
stating that to the best of such officer's knowledge and after making
due inquiry, no Event of Default, Default or Restriction Event has
occurred and is continuing, or if in its opinion an Event of Default,
Default or Restriction Event has occurred and is continuing, a
statement as to the nature thereof and the steps and action being
taken to remedy such event.

(b) As soon as available, one copy of any order issued by
any court, governmental authority, or arbitrator in any proceeding to
which Borrower is a party.

(c) Within three (3) Business Days of each request by
Bank, Borrower will furnish to Bank a listing of all then current
Purchasers, such listing being in detail at least identical to
Schedule 15, and within three (3) Business Days of each request by
Bank, Borrower will execute and deliver a Letter Transfer Order to
Bank with respect to (i) such Purchaser or Purchasers and/or (ii)
Mortgaged Properties, as Bank shall so designate.

(d) Within the period of time prescribed in Schedule 11,
all title opinions, curative actions and other information required by
Schedule 11 hereto, in form and substance satisfactory to Bank and
Bank's legal counsel.

(e) As soon as any material change may occur, but in no
event later than the effective date of any such material change, a
supplemental Schedule or certificate setting forth any such changes or
additions to, or deletions from, or modifications of, any Schedule or
certificate or the information set forth therein, from the date
hereof, and together with the financial statements required pursuant
to Section 4.1(a) of the Guaranty, and the financial statements
required pursuant to Section 9.1, a supplemental Schedule or
certificate of similar scope and detail with respect to any other
changes to any Schedule or certificate, which occurred during the
period then ended from the date hereof.

(f) As soon as available, and in any event within ninety
(90) days after the end of each (i) October 1 hereafter, commencing on
December 31, 1995, Borrower will furnish to

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<PAGE> 45
Bank a projected budget for the operations of Borrower for (A) the
fiscal year commencing with such corresponding October 1, prepared in
a six-month analysis, and (B) the five (5) fiscal years commencing
with such corresponding October 1, prepared in a year-by-year
analysis.

(g) Promptly, such additional information concerning
Borrower or any of its Subsidiaries as Bank may reasonably request.

Section 9.3 Performance of Obligations. Borrower will duly and
punctually pay the Obligations, and Borrower will duly and punctually pay and
perform its obligations, agreements and covenants contained in the Loan
Documents, in each case, in accordance with the terms of the respective Loan
Documents.

Section 9.4 Preservation of Existence and Conduct of Business.
Borrower will preserve and maintain, its corporate existence and all of its
leases, privileges, franchises, qualifications and rights that are necessary or
desirable in the ordinary conduct of its business and conduct its business as
presently conducted in an orderly and efficient manner in accordance with good
business practice. Borrower will not change its name or identity or corporate
structure, or change the location of its place of business or, if it has more
than one place of business, its chief executive office, or the place where it
keeps its books and records, as designated under the designation Principal
Place of Business in the signature pages hereof, without notifying Bank of such
change in writing at least fifteen (15) days prior to the effective date of
such change. Borrower will refrain from remitting or transferring any of its
cash receipts or other funds to any Person during the existence and continuance
of a Restriction Event, other than payment of its trade payables, the
Obligations and obligations and indebtedness owed to Persons other than any of
its Affiliates, which are due and payable in the ordinary course of Borrower's
business.

Section 9.5 Payment of Taxes and Claims. Borrower will pay or
discharge, and will cause each of its Subsidiaries to pay or discharge, at or
before maturity or before becoming delinquent (i) all taxes, levies,
assessments, and governmental charges imposed on it or its income or profits or
any of its Property, and (ii) all lawful claims for labor, material, and
supplies, which, if unpaid, might become a Lien upon any of its Property;
provided, however, that Borrower shall not be required to pay or discharge any
tax, levy, assessment, or governmental charge which is being contested in good
faith by appropriate proceedings diligently pursued, and for which adequate
reserves have been established.

Section 9.6 Inspection Rights. At any reasonable time and from
time to time, Borrower will permit representatives of Bank to examine, copy and
make extracts of its books and records, to visit and inspect its Properties,
and to discuss its business, operations and financial condition and affairs
with its officers and third-party operators and with its independent certified
public accountants

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<PAGE> 46
and consultants, and, with the consent of a Person that Bank reasonably
believes to be an officer of Borrower (which consent will not be unreasonably
withheld or delayed), with other employees of Borrower and other Persons
related to the operations or business of Borrower, all of the foregoing to the
extent reasonably requested by Bank.

Section 9.7 Keeping Books and Records. Borrower will maintain,
and will cause each of its Subsidiaries to maintain, proper books of record and
accounts in conformity with GAAP.

Section 9.8 Compliance with Law. Borrower will comply with all
applicable Governmental Requirements of any Governmental Authority.

Section 9.9 Compliance with Agreements; Trade Debt. Borrower
will comply with all indentures, mortgages, deeds of trust, loan agreements and
other agreements binding on it or affecting its Properties or business.
Borrower will pay and discharge promptly, all trade accounts payable from time
to time incurred in the ordinary course of business, except for such trade
accounts payable as are being contested in good faith and for which adequate
reserves for the full and final payment thereof are being maintained.

Section 9.10 Notices. Borrower will promptly notify Bank of each
of the following: (i) the occurrence of an Event of Default, Default or
Restriction Event, (ii) the commencement of any action, suit, investigation or
proceeding, or the imposition of any judgment, against Borrower which could
reasonably be expected to result in an action, suit, investigation, proceeding
or judgment of a nature or type described in Section 8.6, (iii) any other
matter that could reasonably be expected to have a Material Adverse Effect on
Borrower, and upon the receipt of each such notice by Bank, such additional and
further information with respect thereto as requested by Bank, and (iv) any
modification in the cash management program and procedures from that described
in Section 8.18, or the termination or suspension of such cash management
program.

Section 9.11 Further Assurances. Borrower will cure, at its
expense, promptly any defects in the execution, creation, delivery and issuance
of the Loan Documents, or any of them. Borrower, at its expense, will promptly
execute and deliver to Bank upon request all such other and further documents,
agreements and instruments in compliance with or accomplishment of Borrower's
covenants and agreements in the Loan Documents, or further to evidence and more
fully describe the Property intended as security for the Obligations, or to
correct any omissions in the Loan Documents, or more fully state the security
obligations set out herein or in any of the Loan Documents, or to perfect,
protect or preserve any Liens and other rights created pursuant to any of the
Loan Documents, or to make any recordings, to file any notices, or obtain any
consents, waivers or subordinations, all as may be necessary or appropriate in
connection therewith.

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Section 9.12 Use of Proceeds; Compliance with Regulations G, T, U,
and X. Borrower will use the proceeds of each Advance as provided in Section
8.17, and upon each request of Bank, the Borrower shall promptly furnish to
Bank such evidence as Bank may reasonably require to verify such use. Neither
Borrower nor any Person acting on its behalf will take any action which might
cause this Agreement or any of the Loan Documents to violate, and Borrower will
take all actions necessary to cause compliance with Regulations G, T, U, and X
of the Board of Governors of the Federal Reserve System and the Securities
Exchange Act of 1934, in each case as now in effect or as the same may
hereafter be in effect.

Section 9.13 Engineering Reports.

(a) As soon as available and in any event within 45 days after
the end of each fiscal year of Borrower commencing with fiscal year ended
September 30, 1995, the Borrower shall furnish to Bank a report (the "Reserve
Report") in form and substance satisfactory to Bank, in its sole discretion,
which sets forth estimates of the net proved oil and gas reserves of the Oil
and Gas Properties of Borrower included in the Collateral which are, in the
aggregate, reasonable using generally accepted petroleum engineering and
evaluation principles. The Reserve Report shall be prepared by or at the
direction of Borrower and shall be certified by the senior registered petroleum
engineer of the Borrower as to the truth and accuracy of the information
utilized to prepare the Reserve Report and the estimates included therein, and
shall have been reviewed by an independent petroleum consultant acceptable to
Bank who shall have certified that the estimates in the Reserve Report are, in
the aggregate, reasonable estimates using generally accepted petroleum
engineering and evaluation principles and that the consultant is satisfied with
the methods and procedures used in preparing the Reserve Report. The
principles to be utilized are those set forth in the Standards Pertaining to
the Estimating and Auditing of Oil and Gas Reserve Information promulgated by
the Society of Petroleum Engineers. Bank hereby agrees that Ryder Scott, the
current independent petroleum consultant to Borrower, is acceptable as the
independent petroleum consultant for purposes of this Agreement. The Reserve
Report shall evaluate as of September 30 of such fiscal year the Oil and Gas
Properties of Borrower included in the Collateral and shall, together with any
other information reasonably requested by Bank, set forth the proved oil and
gas reserve estimates attributable to such Property together with a projection
of the rate of production and future net income with respect thereto as of such
date, based upon the pricing assumptions consistent with SEC reporting
requirements at the time.

(b) As soon as available and in any event within 45 days
following each March 31 of each fiscal year of Borrower, Borrower shall furnish
to Bank a report (the Alternate Reserve Report") in form and substance
satisfactory to Bank, prepared in a manner consistent with the provisions of
Section 9.13(a), which shall further evaluate the Property evaluated in the
immediately preceding Reserve Report, and which shall, together with any other
information reasonably requested by Bank, set forth the proved oil and gas
reserve estimates attributable to such Property as of the immediately

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<PAGE> 48
preceding March 31, together with a projection of the rate of production and
net future income with respect thereto as of such date, based upon pricing
assumptions consistent with SEC reporting requirements at the time.

(c) Concurrently with the delivery of the reports required in
Subsections (a) and (b) above, Borrower shall provide to Bank (i) a statement
reflecting any material changes in the net revenue interest of the wells or
leases reflected in the Security Documents after giving effect to all
encumbrances listed therein from the net revenue interests as reflected in such
report, along with an explanation as to any such material discrepancies between
the two net revenue interest disclosures and (ii) a list identifying, for each
well included in the Mortgaged Properties, the purchasers of Borrower's
portion of the oil and gas produced therefrom.

(d) Concurrently with the delivery of the reports required in
Subsections (a) and (b) above, Borrower shall provide to Bank a report in form
and substance satisfactory to Bank in its sole discretion prepared and
certified by the chief financial officer of Borrower, which report shall,
together with any other information requested by Bank, fully set forth and
disclose the volume, estimated amount and nature of any and all gas imbalances
with respect to the Oil and Gas Properties of Borrower included in the Affected
Properties of Borrower as of the date of such reports.

ARTICLE X

Negative Covenants

Section 10.1 Debt. Borrower will not incur, create, assume or
permit to exist any Debt, except (i) Debt to Bank, (ii) indebtedness to KCS
(iii) existing Debt described in Schedule 4 (and renewals, extensions, and
increases of such existing Debt; provided, however, that no increase in such
Debt shall result in a material change in the purpose for which the Debt was
incurred or in the nature of the collateral for such Debt, and (iv) Debt of
Borrower not otherwise permitted by this Section 10.1 which does not exceed at
any one time the aggregate outstanding principal amount of $100,000.00.

Section 10.2 Limitation of Lien. Borrower will not incur, create,
assume or permit or suffer to exist any Lien upon the Collateral, assets or
revenues, whether now owned or hereafter acquired, except:

(a) Liens disclosed on Schedule 5 hereto;

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(b) Liens in favor of Bank;

(c) Encumbrances consisting of minor easements, zoning
restrictions, or other restrictions on the use of real property that
do not materially affect the value of the Properties encumbered
thereby or adversely impair the ability of Borrower to use such
Properties in its business;

(d) Liens for taxes, assessments, or other governmental
charges which are not delinquent, or which are being diligently
contested in good faith and for which adequate reserves have been
established;

(e) Liens of mechanics, materialmen, warehousemen,
carriers or other similar statutory Liens securing obligations that
are not yet due and are incurred in the ordinary course of business,
or which are being diligently contested in good faith and for which
adequate reserves have been established;

(f) Liens securing the permitted indebtedness referred to
in clauses (iii) and (iv) of Section 10.1, provided that the
obligations secured by such Liens do not exceed the amount of such
permitted indebtedness from time to time outstanding and such Liens do
not cover or affect any of the Collateral;

(g) Liens resulting from deposits to secure payments of
workmen's compensation or other social security programs or to secure
the performance of tenders, statutory obligations, surety and appeal
bonds, bids, or contracts in the ordinary course of business.

Section 10.3 Negative Pledge Amount. Borrower will not create,
enter into, execute, incur, assume or permit to exist, any contract, agreement
or understanding (other than the Loan Documents) which in any manner prohibits
or restricts the granting, conveying, creation or imposition of any Lien on any
of the Collateral, or which requires the consent of, or notice to, other
Persons in connection therewith.

Section 10.4 Mergers and Dissolutions: Change in Business
Structure.

(a) Borrower will not become a party to a merger or
consolidation, or dissolve or liquidate.

(b) Borrower will not amend or otherwise modify its
corporate charter or its corporate structure, activities or nature, as
applicable, in any manner that could have a Material Adverse Effect on
it. Borrower will not become a general partner, joint venturer or

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<PAGE> 50
venturer in any Person or become or assume any similar capacity in any
Person which gives rise to such similar general liability.

Section 10.5 Restricted Payments .

(a) Borrower will not declare or pay any dividends or
make any other payment on account of its capital stock, or redeem,
purchase, retire or otherwise acquire for value any of its capital
stock, or grant or issue any capital stock or any warrant, right, or
option pertaining to its capital stock, or issue any security
convertible into capital stock, or issue any capital to its
stockholders, or make any distributions of its assets to its
stockholders, or make any distributions of any kind to its general or
limited partners, joint venturers or Person of similar status.

(b) Borrower will not make any payments on any Debt
other than Debt permitted under Section 10.1 hereof.

Section 10.6 Loans, Advances and Investments. Borrower will not
make or permit to remain outstanding, any advance, loan, extension of credit,
or capital contribution to or investment in, or purchase or own any stock,
bonds, notes, debentures or other securities (which term securities shall not
mean a direct ownership of record in fractional undivided interests in oil and
gas properties) of any Person, except;

(a) readily marketable direct obligations of the United
States of America which mature within one (1) year from the date of
creation thereof;

(b) deposits maturing within one (1) year from the date
of creation thereof with (including certificates of deposits issued
by) Bank or any office located in the United States of America of any
other commercial bank or trust company that is organized under the
laws of the United States of America or any state thereof, which
insures its and such deposits with the Federal Deposit Insurance
Corporation (or any successor) and has capital, surplus and undivided
profits aggregating at least $100,000,000 as of the date of such
Person's most recent financial report;

(c) commercial paper of a domestic issuer maturing within
one (1) year from the date of creation thereof rated in one of the
two highest rating categories of Standard and Poor's Corporation or
Moody's Investors Service;

(d) LIBOR deposits of maturities less than one (1) year,
issued by (and supported by the full faith and credit and representing
direct obligations of) Bank or any other

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commercial bank or trust company that is organized under the laws of
the United States of America or any state thereof, which has capital,
surplus and undivided profits in excess of $500,000,000 as of the date
of such Person's most recent financial reports;

(e) loans, advances and investments identified on
Schedule 13 hereto;

(f) advances by Borrower to KCS pursuant to the cash
management program described in Section 8.18 and so long as no
Restriction Event exists; and

(g) investments in repurchase agreements of maturities
less than thirty (30) days, with the asset being purchased being
direct obligations of the United States of America, and issued by Bank
or any other commercial bank or trust company that is organized under
the laws of the United States of America or any state thereof, which
has capital, surplus and undivided profits in excess of $100,000,000
as of the date of such Person's most recent financial report.

Section 10.7 Transactions with Affiliates. Except for
transactions among the Borrower and its Subsidiaries, as expressly permitted by
this Agreement, Borrower shall not enter into any transaction, including,
without limitation, any purchase, sale, lease or exchange of property or the
rendering of any service, with any Affiliate unless such transactions are not
otherwise in violation of any Loan Document and are in the ordinary course of
business of Borrower , and are upon fair and reasonable terms no less favorable
to Borrower, than would be obtained in a comparable arm's length transaction
with a Person not an Affiliate of Borrower.

Section 10.8 Disposition of Assets: Sale Leaseback.

(a) Borrower will not sell, lease, assign, transfer, or
otherwise dispose of any of Collateral, or any portion thereof, except
dispositions of inventory in the ordinary course of business.

(b) Borrower will not enter into any arrangement, directly or
indirectly, with any Person, whereby it shall sell, transfer or otherwise
dispose of any of its Collateral, whether now owned or hereafter acquired, and
thereafter rent or lease as lessee such Property or any part thereof which it
intends to use for substantially the same purpose or purposes as the Property
sold or transferred.

Section 10.9 Prepayment of Debt. Borrower will not prepay any
Debt except Debt permitted pursuant to Section 10.1 hereof.

Section 10.10 Use of Proceeds. Borrower will not permit the
proceeds of any Advance to be used for any purpose other than as expressly
permitted in Section 2.5.

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Section 10.11 Sale or Discount of Receivables. Borrower will not
(i) sell or discount any of its accounts or notes receivable that are required
to be included in the Collateral, or (ii) except pursuant to a securitization
or other financing transaction which is in accordance with financing practices
that are usual at the time, discount or sell, with recourse, or sell without
recourse, for less than the face amount of any of its receivables that are not
required to be included in the Collateral, unless reasonably necessary in
connection with collection efforts on delinquent receivables.

Section 10.12 Concentration Account. Borrower will not (i) permit
or authorize any of the funds transferred by or on behalf of Borrower to the
Concentration Account to be disbursed or withdrawn therefrom other than for
transfer (A) to Borrower's Disbursement Account or (B) to such account or
accounts solely maintained by Borrower or KCS at a Qualified Bank, (ii) deposit
or maintain or authorize or direct to be deposited or maintained, any of its
cash receipts or other funds in any Person, other than a Qualified Bank, or
(iii) transfer or direct or permit to be transferred or directed, any of its
cash receipts or other funds to (A) the Concentration Account if at any such
time of transfer the Concentration Account is not maintained in a Qualified
Bank or (B) the Concentration Account during any Restriction Event, and during
such times, Borrower shall retain sole dominion and control over its cash
receipts and other funds in a Qualified Bank, subject to Bank's Lien. Borrower
will not modify or permit to be modified the cash management program described
in Section 8.18, other than refraining from depositing or transferring any of
its cash receipts or other funds to the Concentration Account upon the
occurrence and during the existence of a Restriction Event, or create or permit
to be created any other cash management programs involving its cash receipts
and other funds with the cash receipts and other funds of any other Person
without first notifying Bank of any such occurrences and thereafter permitting
Bank a reasonable opportunity to take such actions and consummate such
agreements in a manner at least consistent with the agreements it currently has
with respect to such cash management program, and in each such instance,
Borrower will cooperate with Bank.

Section 10.13 Environmental Matters. Except for customary
obligations that arise and/or are diligently managed in the normal course of
Borrower's business pursuant to operating regulatory requirements, Borrower
will not, cause or knowingly permit any of its respective Properties to be in
violation of, or do anything or permit anything to be done which could subject
any such Property to any remedial obligations under, any Environmental Laws,
assuming disclosure to the applicable Governmental Authority of all relevant
facts, conditions and circumstances, if any, pertaining to such Property.
Borrower will promptly notify Bank in writing of any existing, pending or
threatened action or investigation by any Governmental Authority in connection
with any Environmental Laws. Borrower will establish and implement practices
and procedures that are intended reasonably to determine and assure, consistent
with a prudent operator standard and generally accepted standards and practices
in the oil and gas industry, that (i) no solid wastes are disposed of on any
Property owned by Borrower in quantities or locations that would require
remedial action under any Environmental Laws, except in compliance with
applicable Environmental Laws, (ii) except as

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released in compliance with applicable Environmental Laws, no hazardous
substance will be released on or to any such Property in a quantity equal to or
exceeding that quantity which requires reporting pursuant to Section 103 of
CERCLA or any other applicable Environmental Laws, (iii) no hazardous substance
is released on or to any such Property so as to pose an imminent and
substantial endangerment to public health or welfare or the environment, (iv)
all hazardous wastes and, to the extent required by the Texas Railroad
Commission (or equivalent and/or successor agency or agencies of the State of
Texas) and/or other applicable Governmental Authority, solid wastes and oil and
gas wastes generated by any Borrower or any of their Subsidiaries, or on any
Property of any of them, to the extent necessary for disposal off site, will be
transported only by carriers maintaining valid permits under RCRA and other
applicable Environmental Laws and treated, stored, and disposed of only by
facilities operating in compliance with RCRA and other applicable Environmental
Laws, and (v) each of the Borrowers and their respective Subsidiaries, and
their respective Properties and operations, will be maintained and operated in
compliance with all permits, licenses, and similar authorizations required
pursuant to any applicable Environmental Laws. Upon the violation of
applicable Environmental Laws, Borrower will take whatever action is required
by law promptly upon discovery to remedy the same.

ARTICLE XI

Default

Section 11.1 Events of Default. Each of the following shall be
deemed an "Event of Default":

(a) (i) Borrower shall fail to pay, when due, any
principal payment or interest on the Total Credit Principal or (ii)
Borrower shall fail to pay, when due, any of the Obligations, (other
than principal of, or interest on, the Total Credit Principal), and
such failure shall continue unremedied for a period of five (5) days;
or

(b) any representation, warranty or certification made or
deemed made by, or on behalf of, Borrower or KCS (or any of their
respective employees, officers, agents or consultants) in any Loan
Document or in any certificate, report (including, without limitation,
Engineering Reports), notice or financial statement furnished pursuant
to, or in connection with, the provisions of any Loan Document shall
be or prove to have been false, misleading, or erroneous, in any
material respect, when made or deemed to have been made; or

(c) (i) Borrower shall fail to perform, observe or comply
with (A) any of its obligations under Article X (other than Section
10.2 with respect to a Lien not incurred, created, assumed or
permitted to exist by Borrower and which secures the payment of an
inconsequential amount), or (B) Section 10.2 with respect to any Lien
not incurred, created,

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assumed or permitted to exist by Borrower and which secures the
payment of an inconsequential amount, and such Lien shall continue
unreleased, or unbonded by a financially capable and responsible
Person, other than Borrower, for a period of 10 Business Days after
the imposition thereof, (ii) KCS shall fail to perform, observe or
comply with any of its obligations under Article V of the Guaranty,
(iii) KCS shall fail to perform, observe or comply with any of its
obligations under Article VI of the Guaranty, or (iv) there exists the
occurrence of any other event or circumstance which constitutes a
default under any other Loan Document, which continues beyond any
applicable cure or grace period; or

(d) other than as provided for in any other clause of
this Section 11.1 (such other clause controlling the occurrence of an
Event of Default in respect to the subject matter thereof), Borrower
or KCS shall fail to perform, observe or comply with any of its other
obligations, agreements or covenants in any of the Loan Documents to
which any of them is a party, and such failure shall continue
unremedied for a period of 60 days from the day such performance,
observance or compliance was required; or

(e) Borrower or KCS shall (i) dissolve or terminate its
existence, (ii) discontinue its usual business, (iii) apply for or
consent to the appointment of, or the taking of possession by, a
receiver, trustee, custodian, liquidator or other similar Person of
itself or of all or a substantial part of its Property, (iv) make a
general assignment for the benefit of creditors, (v) admit in writing
its inability to, or be generally unable to, pay its debts as they
come due, (vi) commence a voluntary proceeding or case under the
federal Bankruptcy Code, (vii) file a petition or otherwise commence a
proceeding or case seeking to take advantage of any other law relating
to bankruptcy, insolvency, reorganization, winding-up or composition
or readjustment of debts, (viii) fail to controvert in a timely and
appropriate manner, or acquiesce in writing to, any petition against
it in any involuntary case under the federal Bankruptcy Code or any
other law relating to bankruptcy, insolvency, reorganization,
winding-up or composition or readjustment of debts, now or hereafter
in effect, or (ix) take any corporate or partnership action, as
applicable, for the purpose of effecting any of the foregoing; or

(f) a proceeding or case shall be commenced, without the
application or consent of Borrower or KCS, in any court of competent
jurisdiction, seeking (i) its liquidation, reorganization, dissolution
or winding-up, or the composition or readjustment of its debts, (ii)
the appointment of a trustee, receiver, custodian, liquidator or other
similar Person of Borrower or KCS or of all or any substantial part of
its Property, or (iii) similar relief in respect of Borrower or KCS
under any law relating to bankruptcy, insolvency, reorganization,
winding-up, or composition or adjustment of debts, and such proceeding
or case shall continue undismissed, or an order, judgment or decree
approving or ordering any of the foregoing shall be entered and
continue unstayed and in effect, for a period of thirty (30) days;

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or an order for relief against Borrower or KCS shall be entered in an
involuntary case under the Federal Bankruptcy Code; or

(g) (i) default in the payment, when due, of any
principal of or interest on any Debt or Debts of Borrower, which Debt
or Debts (as distinguished from the amount of the defaulted payment or
payments of principal thereof or interest thereon), individually or
when aggregated with other such defaulted Debt or Debts of Borrower,
individually or in the aggregate, equal or exceed $500,000, or the
occurrence of any event, circumstance or condition which, without
regard to any applicable cure or notice period or lapse of time, would
constitute a default by Borrower of any agreement, contract,
promissory note, loan agreement, indenture, lien instrument or the
like to which Borrower is a party or by which any of its Property is
subject and which evidences or relates to a Debt or Debts,
individually or in the aggregate, of an aggregate amount equal to or
in excess of $500,000, whether or not a party thereto exercises any of
its rights and remedies with respect to such default; or (ii) the
occurrence of any event, circumstance or condition which, in the
reasonable determination of Bank, results in a material adverse change
in the condition (financial or otherwise) of KCS and its Subsidiaries
taken as a whole; or

(h) default under the terms of (i) that certain Amended
and Restated Credit Agreement dated March 15, 1994 among KCS, KCS
Pipeline Systems, Inc. and Bank One, Texas, National Association; or
(ii) that certain Loan Agreement dated January 11, 1995 among
Canadian Imperial Bank of Commerce, as Lender, Borrower, KCS and
Proliq, Inc.

(i) a final judgment or judgments for the payment of
money in excess of $500,000 in the aggregate shall be rendered by a
court or courts against Borrower or KCS (exclusive of any judgment
amount fully covered by insurance where the insurer has admitted or
not denied liability in respect of such judgment amount), and the same
shall not be discharged (or provision shall not be made for such
discharge), or a stay of execution thereof shall not be procured,
within 30 days from the date of entry thereof, and Borrower or KCS
shall not, within said period 30 days, or such longer period during
which execution of the same shall have been stayed, appeal therefrom
and cause the execution thereof to be stayed during such appeal; or

(j) An event or condition specified in Section 5.4 of the
Guaranty shall occur or exist with respect to any Plan or
Multiemployer Plan and, as a result of such event or condition,
together with all other such events or conditions, Borrower, KCS or
any ERISA Affiliate shall incur or in the opinion of Bank shall be
reasonably likely to incur a liability to a Plan, a Multiemployer Plan
or PBGC (or any combination of the foregoing) which is, in the
determination of Bank, material in relation to the financial position
of Borrower or KCS; or

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(k) the destruction or condemnation of, or occurrence of
substantial damage or condemnation to any of the Properties referred
to in the Oil and Gas Mortgages, or (iii) any other Property of
Borrower in an amount in excess of $500,000 in the aggregate and for
which there is no or substantially no insurance coverage in respect
thereto and/or for which no or substantially no insurance coverage or
condemnation proceeds will be timely used and/or paid in respect
thereto, and within 10 Business Days after Bank has notified, in
writing, Borrower of a redetermined Credit Borrowing Base as a result
of the occurrence of any of the events referred to in the preceding
clauses (i) through (iii), Borrower fails either to (A) prepay the
principal on the Credit Note in an amount at least equal to the amount
that the Total Credit Principal exceeds such redetermined Credit
Borrowing Base, or (B) grant to Bank a perfected, first priority Lien
on Oil and Gas Properties not then covered by a Security Document,
which is of a nature, value, quantity and quality satisfactory to
Bank; or

(l) Borrower shall have concealed, removed or permitted
to be concealed or removed, any part of its Property, with intent to
hinder, delay or defraud its creditors or any of them; or shall have
suffered or permitted, while insolvent, any credit or to obtain a Lien
upon any of its Property through legal proceedings or distraint or
other process; or

(m) this Agreement or any other Loan Document, or any
Lien or assignment created thereby, shall cease to be in full force
and effect, or shall be declared null and void, or the validity or
enforceability thereof shall be contested or challenged by Borrower
or KCS, or any of their respective shareholders, partners, beneficial
owners or Affiliates, or any other Person (and such contest or
challenge by a Person other than any Borrower or KCS is not fully and
finally dismissed with prejudice within 30 days of the day of such
Person's initial assertion thereof), or Borrower or KCS shall deny
that it has, or contend or assert (including, without limitation, by
announcement or revocation) that it does not have, any liability or
obligation under any of the Loan Documents, or that any Lien or
assignment created by any Loan Document is no longer in full force and
effect.

Section 11.2 Remedies Upon Default. Upon the occurrence and
during the continuance of an Event of Default, other than one referred to in
clause (e) or clause (f) of Section 11.1, Bank may terminate its commitment to
lend hereunder and/or declare the principal amount then outstanding of the
Credit Note and all then earned and accrued interest thereon, and all other
earned amounts payable by either Borrower or KCS under, or in connection with,
the Loan Documents to be immediately due and payable, whereupon such amounts
shall be immediately due and payable, without notice, demand, notice of
presentment, presentment, presentment for payment, demand for payment,
non-payment, notice of dishonor, dishonor, notice of intent to accelerate,
notice of acceleration, notice of intent to demand, protest, notice of protest,
notice of intent to terminate, notice of termination, grace or any other notice
or formalities of any kind, all of which are hereby expressly waived by each of
Borrower, KCS and all other Persons; and upon the occurrence of an Event of

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Default referred to in clause (e) or clause (f) of Section 11.1, the commitment
of Bank to lend hereunder shall automatically terminate and be cancelled, and
the principal amount then outstanding of the Credit Note, and all then earned
and accrued interest thereon, and all other earned amounts payable by Borrower
or KCS under, or in connection with, the Loan Documents, shall become
immediately due and payable without notice, demand, notice of presentment,
presentment, presentment for payment, demand for payment, non-payment, notice
of dishonor, dishonor, notice of intent to accelerate, notice of acceleration,
notice of intent to demand, protest, notice of protest, notice of intent to
terminate, notice of termination, grace or any other notices or formalities of
any kind, all of which are hereby expressly waived by Borrower, KCS, and all
other Persons. Upon the occurrence of any Event of Default, Bank may exercise
any and all rights and remedies available to it in law or in equity, under the
Loan Documents, or otherwise.

Section 11.3 Certain Events.

(a) Borrower shall not be deemed to have committed a breach of
any of the warranties and representations contained in Sections 8.19(a)(c) and
(d) or of the covenants and agreements in the first sentence of Section 10.13
if on any date the estimated amount to be expended by Borrower, during the
twelve (12) months next succeeding such date, for (i) remediation of all
violations of Environmental Laws on all Properties of Borrower, as estimated
by the environmental consultants or engineers, reasonably acceptable to Bank,
retained to implement such remediation plus (ii) the amount reasonably
estimated to be the liability of Borrower in the aggregate upon the occurrence
of any event described in Section 8.19(d) is no more than $300,000. Copies of
the cost estimates made by such environmental consultants or engineers shall be
furnished to Bank by Borrower promptly after Borrower has received the same.
Within 30 days after the occurrence of any event described in Section 8.19(d)
Borrower shall furnish Bank with an estimate of the liability of Borrower as
the result of such occurrence during such 12 month period, which estimate shall
disclose in detail the basis for such estimate.

(b) KCS shall not be deemed to have committed a breach of any
of the warranties and representations contained in Sections 3.12(a), (c) and
(d) of the Guaranty or of the covenants and agreements in the first sentence of
Section 5.3 of the Guaranty if on any date the estimated amount to be expended
by KCS and its Subsidiaries (other than the Borrower), during the twelve months
next succeeding such date, for (i) remediation of all violations of
Environmental Laws on all Properties of KCS and its Subsidiaries (other than
the Borrower) as estimated by the environmental consultants or engineers,
reasonably acceptable to Bank, retained to implement such remediation plus (ii)
the amount reasonably estimated to be the liability of KCS and its Subsidiaries
(other than the Borrower) in the aggregate upon the occurrence of any event
described in Section 3.12(d) of the Guaranty is no more than $300,000. Copies
of the cost estimates made by such environmental consultants or engineers shall
be furnished to Bank by KCS promptly after KCS has received the same. Within
30 days after the occurrence of any event described in Section 3.12(d), KCS
shall furnish Bank with an

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estimate of the liability of KCS as the result of such occurrence during such
12 month period, which estimate shall disclose in detail the basis for such
estimate.

Section 11.4 Limited Remedy. The failure of Borrower to satisfy
the provisions of Section 9.2(d) shall not constitute a Default or Event of
Default but shall give rise to the sole remedy in favor of Bank of reducing the
Credit Borrowing Base by an amount or amounts determined by Bank in its sole
discretion.

Section 11.5 Notice of Actions Taken.

(a) After Bank has exercised its right of set off as provided
in Section 6.2 or its right to terminate its commitment to lend hereunder or
accelerate the payment of the Obligations as provided in Section 11.2, Bank
will endeavor to notify Borrower within a time period thereafter, which Bank
deems reasonable; provided however, (i) Bank's undertaking to provide the
notices pursuant to this Section 11.5 is not intended to be nor shall be
construed to be, a condition precedent, or other requirement of it, to the
exercise by Bank of any of its rights, remedies, privileges and benefits under
any of the Loan Documents, or a modification to the waivers of notices and
other formalities as provided in Section 6.2 and Section 11.2, respectively,
(ii) notwithstanding anything to the contrary contained above in this Section
11.5, Bank shall have no obligation whatsoever to provide notices to Borrower
or any other Person if Bank has exercised any of the above-referenced rights as
a result of the occurrence of any of the events described in clause (e) or
clause (f) of Section 11.1, and (iii) the failure of Bank to give Borrower or
any other Person any notice referred to in this Section 11.5 shall in no manner
affect or prejudice the rights, remedies, privileges and benefits theretofore,
then and thereafter exercised or taken by Bank.

(b) Within a reasonable period following Bank's receipt of a
written request from Borrower or KCS inquiring whether Bank has accelerated the
payment of the Obligations, as herein provided, on or before the date specified
in such written request of Borrower or KCS, Bank will advise such requesting
Person, in writing, whether any such acceleration had occurred, which advice of
Bank will not be unreasonably withheld or delayed.

Section 11.6 Proceeds of Production from the Mortgaged Properties;
Letter Transfer Orders. Upon the occurrence and during the continuance of a
Default pursuant to clause (f) of Section 11.1 or an Event of Default, (i) Bank
shall be entitled to transmit the Letter Transfer Orders to the Purchasers and
(ii) Borrower, on demand by Bank, shall immediately deliver to Bank (A) a
listing of all then current Purchasers, in detail at least identical to
Schedule 15 and (B) Letter Transfer Orders executed by Borrower with respect to
(y) such Purchasers or (z) Mortgaged Properties, as Bank shall then and then
after designate. Bank and Borrower agree that in the absence of the existence
of a Default pursuant to clause (f) of Section 11.1 or an Event of Default,
Bank shall hold the Letter Transfer Orders and not transmit them to the
Purchasers, and notwithstanding any

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provision in Article IV of the Mortgages to the contrary, Borrower shall have
the right to receive and retain the Assigned Proceeds (as defined in the
Mortgages) until such Default or Event of Default.

ARTICLE XII

Miscellaneous

Section 12.1 Expenses of Bank.

(a) Borrower hereby agrees to pay Bank, whether or not the
transactions hereby contemplated are consummated, on demand: (i) all reasonable
costs and expenses incurred by, or on behalf of, Bank (both before and after
closing) in connection with the investigation, negotiation, preparation,
execution, closing, delivery, filing, recordation, refinancing, restructuring
and/or renegotiation of this Agreement and the other Loan Documents, and the
transactions contemplated hereby and thereby, and any and all amendments,
modifications, restatements, assignments of the Credit Note (or any portion
thereof) requested by Borrower, supplements, waivers and consents relating
hereto or thereto, including, without limitation, the fees, disbursements and
expenses of Bank's legal counsel, (ii) all reasonable costs and expenses
incurred by, or on behalf of, Bank (whenever incurred), including, without
limitation, such costs and expenses incurred by each Mortgage trustee, (A) to
preserve, maintain, protect and perfect its rights under each Loan Document and
its Liens in the Collateral and (B) in connection with the enforcement of this
Agreement or any other Loan Document, including, without limitation, the fees,
disbursements and expenses of Bank's legal counsel (whether or not incurred in
connection with the commencement of a proceeding, litigation, foreclosure or
other judicial proceeding), and (iii) all other reasonable costs and expenses
incurred by, or on behalf of, Bank (whenever incurred) in connection with the
foregoing or otherwise in connection with any Loan Document, including, without
limitation, (A) all costs, expenses, mortgage taxes, stamp taxes, assessments,
filing fees and other charges levied by a governmental authority or otherwise
payable in respect of this Agreement or any other Loan Document, (B) fees,
disbursements and expenses of Bank's legal counsel in connection with advice or
counsel to Bank regarding the Loan Documents, and (C) all amounts expended,
advanced or incurred by or on behalf of Bank, including, without limitation,
such costs and expenses incurred by each Mortgage trustee, to satisfy any
obligation of Borrower or KCS under any Loan Document which is not timely
satisfied by Borrower or KCS; provided, however, with respect to the reasonable
costs and expenses incurred by, or on behalf of, Bank which are referred to in
clause (iii) (B) in this Section 12.1(a), Bank will endeavor to be reasonable
in the incurrence of such costs and expenses and will endeavor to incur such
costs and expenses in a judicious manner and to cause such costs and expenses
to be incurred in a judicious manner, all within the exercise of the reasonable
judgment of Bank. The costs, expenses and other amounts provided in this
Section 12.1 are cumulative of all other expenses, costs, other amounts and
indemnities of Borrower provided for in this Agreement and the other Loan
Documents.

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(b) All attorneys, accountants, engineers, geologists,
consultants, appraisers and other professional Persons and consultants who are
engaged or employed by Bank and whose fees and expenses may be paid pursuant to
the terms of this Agreement or any other Loan Document shall have the right to
act exclusively in the interest of Bank and shall have no duty of disclosure,
duty of loyalty, duty of care or any other duty of any type or nature
whatsoever to Borrower or KCS, or any of their Subsidiaries.

Section 12.2 INDEMNIFICATION.

(a) BORROWER AGREES TO DEFEND, PROTECT, INDEMNIFY, AND HOLD HARMLESS
BANK AND ITS AFFILIATES, SUBSIDIARIES, PARENT COMPANY AND OTHER RELATED
ENTITIES, AND ITS AND THEIR DIRECTORS, OFFICERS, EMPLOYEES, MORTGAGE TRUSTEES,
ATTORNEYS, ACCOUNTANTS, ENGINEERS, GEOLOGISTS, CONSULTANTS, OTHER
PROFESSIONALS, AGENTS, INSURERS AND SHAREHOLDERS (AND TOGETHER WITH EACH AND
ALL OF ITS AND THEIR RESPECTIVE SUCCESSORS, ASSIGNS, HEIRS AND LEGAL
REPRESENTATIONS, COLLECTIVELY CALLED THE "INDEMNITEES") FROM AND AGAINST ANY
AND ALL LIABILITIES, OBLIGATIONS, LOSSES, DAMAGES, PENALTIES, ACTIONS,
JUDGMENTS, SUITS, CLAIMS, COSTS, EXPENSES AND DISBURSEMENTS OF ANY KIND OR
NATURE WHATSOEVER (INCLUDING, WITHOUT LIMITATION, THE REASONABLE FEES AND
DISBURSEMENTS OF COUNSEL FOR SUCH INDEMNITEES IN CONNECTION WITH ANY
INVESTIGATIVE, ADMINISTRATIVE OR JUDICIAL PROCEEDING, WHETHER OR NOT SUCH
INDEMNITEES SHALL BE DESIGNATED A PARTY THERETO), WHICH MAY BE IMPOSED ON,
INCURRED BY, OR ASSERTED AGAINST, SUCH INDEMNITEES (WHETHER DIRECT, INDIRECT OR
CONSEQUENTIAL AND WHETHER BASED ON ANY FEDERAL OR STATE LAWS OR OTHER STATUTORY
REGULATIONS, INCLUDING, WITHOUT LIMITATION, SECURITIES, ENVIRONMENTAL AND
COMMERCIAL LAWS AND REGULATIONS, UNDER COMMON LAW OR AT EQUITABLE CAUSE, OR ON
CONTRACT, TORT OR OTHERWISE) IN ANY MANNER RELATING TO, OR ARISING OUT OF, THIS
AGREEMENT OR ANY OTHER LOAN DOCUMENT OR ANY ACT, EVENT OR TRANSACTION RELATED
OR ATTENDANT HERETO OR THERETO, OR CONTEMPLATED HEREBY OR THEREBY, INCLUDING,
WITHOUT LIMITATION (I) THE NEGOTIATION, EXECUTION, DELIVERY, PERFORMANCE,
ADMINISTRATION OR ENFORCEMENT OF EACH LOAN DOCUMENT, (II) ANY OF THE
TRANSACTIONS CONTEMPLATED BY THE LOAN DOCUMENTS, (III) ANY BREACH BY BORROWER
OR KCS OF ANY REPRESENTATION, WARRANTY, COVENANT, OR OTHER AGREEMENT CONTAINED
IN ANY LOAN DOCUMENT, (IV) THE PRESENCE, RELEASE, THREATENED RELEASE, DISPOSAL,
REMOVAL, OR CLEANUP OF ANY HAZARDOUS SUBSTANCE LOCATED ON, ABOUT, WITHIN OR
AFFECTING ANY OF THE PROPERTIES OR ASSETS

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OF BORROWER OR KCS, OR ANY OF THEIR SUBSIDIARIES, (V) THE FAILURE OF TITLE TO
ALL OR PART OF THE MORTGAGED PROPERTIES, OR ANY OTHER COLLATERAL, OR THE
FAILURE OR INABILITY OF BORROWER, FOR ANY REASON, TO CONVEY THE RIGHTS, TITLES
AND INTERESTS WHICH ANY SECURITY DOCUMENT PURPORTS TO MORTGAGE, CONVEY, GRANT
OR ASSIGN, (VI) THE FAILURE OR INABILITY OF KCS TO ENTER INTO, EXECUTE OR
PERFORM ITS OBLIGATIONS UNDER THE GUARANTY, OR (VII) ANY INVESTIGATION,
LITIGATION, OR OTHER PROCEEDING, INCLUDING, WITHOUT LIMITATION ANY THREATENED
INVESTIGATION, LITIGATION, OR OTHER PROCEEDING RELATING TO ANY OF THE FOREGOING
(COLLECTIVELY, THE "INDEMNIFIED MATTERS"); PROVIDED THAT BORROWER SHALL NOT
HAVE ANY OBLIGATION TO AN INDEMNITEE HEREUNDER WITH RESPECT TO INDEMNIFIED
MATTERS DIRECTLY AND SOLELY CAUSED BY OR RESULTING FROM THE WILLFUL MISCONDUCT
OR GROSS NEGLIGENCE OF SUCH INDEMNITEE (AS OPPOSED TO OTHER INDEMNITEES).

(b) WITHOUT LIMITING ANY PROVISION OF ANY LOAN DOCUMENT, IT IS
THE EXPRESS INTENTION OF THE PARTIES HERETO THAT EACH INDEMNITEE SHALL BE
INDEMNIFIED AND HELD HARMLESS AS PROVIDED IN THE IMMEDIATELY PRECEDING SENTENCE
FOR ANY INDEMNIFIED MATTER ARISING OUT OF, OR RESULTING FROM, THE SOLE,
COMPARATIVE, OR CONTRIBUTORY NEGLIGENCE (BUT NOT THE GROSS NEGLIGENCE OF SUCH
INDEMNITEE) OF SUCH INDEMNITEE, OR THE ALLEGATION THEREOF AGAINST SUCH
INDEMNITEE.

(c) To the extent that the undertaking to indemnify, pay and
hold harmless set forth in this Section 12.2 may be unenforceable because it is
violative of any law or public policy as determined by the final unappealable
judgment or order of a court of competent jurisdiction, Borrower and KCS,
jointly and severally, shall contribute the maximum portion that it is
permitted to pay and satisfy under applicable law, to the payment and
satisfaction of all Indemnified Matters incurred by the Indemnitees. The
provision of this Section 12.2 shall survive the repayment of the Obligations
and any termination, however arising, of this Agreement, any other Loan
Document, or the Credit Commitment provided for herein.

Section 12.3 Restatement; Exhibits and Schedules; Reliance on
Documents.

(a) Each request by Borrower for an Advance hereunder (whether
by Advance Request Form or otherwise) shall by virtue of such delivery or
request alone constitute a restatement of Section 7.2(d) on and as of the date
of delivery or the date requested for the Advance. Each such request shall
also constitute a representation and warranty at the time of said delivery or
on the date requested for the Advance of Section 7.2(b) and Section 7.2(c).

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(b) All exhibits, schedules, attachments and similar referenced
documents mentioned herein and in any other Loan Document to which Borrower is
a party are hereby incorporated by reference herein and therein for all intents
and purposes, unless otherwise expressly provided to the contrary within the
reference to such exhibit, schedule, attachment or other document. Any
exhibit, schedule, attachment or similar referenced document referenced herein
as being, from time to time after the date hereof, supplemented, amended,
updated or otherwise modified, shall be deemed supplemented, amended, updated
or otherwise modified when Bank has received the information or matters
referenced as designated therein in form, substance and scope satisfactory to
it, whether or not such information or matter shall be evidenced or referenced
by an instrument entitled as an exhibit or schedule or a supplement to an
exhibit or a supplement to a schedule or similar labels, and the receipt of
such information or matters by Bank, whether or not it is affixed hereto or to
any other instrument theretofore delivered to Bank, shall for all intents and
purposes of the Loan Documents to which Borrower is a party constitute and
satisfy all matters intended to be accomplished by such supplements,
amendments, updates or other modifications.

(c) Any oral communication or instrument in writing, telex,
telegram, telecopy, facsimile, cable or other transmission received by Bank in
connection with an Advance hereunder or any other matter with respect to any
Loan Document to which Borrower is a party which purports to be dispatched or
signed by or on behalf of Borrower shall conclusively be deemed to have been
dispatched or signed by or on behalf Borrower pursuant to such Person's
authority to bind Borrower and all other Persons for the liabilities and
matters in connection therewith to Bank, and Bank may conclusively rely thereon
and shall have no obligation, duty or responsibility to determine the validity
or genuineness thereof or the authority of the Person or Persons executing or
dispatching the same.

Section 12.4 No Waiver: Cumulative Remedies. No failure on the
part of Bank to exercise and no delay in exercising, and no course of dealing
with respect to, any right, power, or privilege under this Agreement or any
other Loan Document shall operate as a waiver thereof, nor shall any single or
partial exercise of any right, power or privilege, or any abandonment or
discontinuance of steps or actions to enforce such a right, power or privilege,
under any Loan Document preclude any other or further exercise thereof or the
exercise of any other right, power, or privilege. The rights and remedies
provided for in this Agreement and the other Loan Documents are cumulative and
not exclusive of any rights and remedies provided by law or at equity.

Section 12.5 Successors and Assigns. This Agreement, the Credit
Note and each of the other Loan Documents to which Borrower and/or Bank is a
party is binding upon and shall inure to the benefit of the parties hereto and
thereto, and their respective successors and assigns, except that Borrower may
not assign or transfer any of its rights under this Agreement or any other Loan
Document.

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Section 12.6 Survival of Representations and Warranties. All
representations and warranties made by, or on behalf of, Borrower in each Loan
Document or in any document, statement, or certificate furnished by, or on
behalf of, any Borrower in connection with any Loan Document shall survive the
execution and delivery of this Agreement and the other Loan Documents and the
making of the Advances and no investigation at any time made by or on behalf of
Bank shall diminish or otherwise affect such representations and warranties or
the right of Bank to rely upon them. All statements made by or on behalf of
Borrower in connection with any Loan Document or the transactions contemplated
thereby shall constitute representations and warranties of Borrower.

Section 12.7 Entire Agreement: Amendment. This Agreement, the
Credit Note and the other Loan Documents embody the final, entire agreement
among the parties hereto and thereto and supersede any and all prior
commitments, agreements, representations and understandings, whether written or
oral, relating to the subject matter hereof and thereof. The provisions of
this Agreement and the other Loan Documents to which Borrower is a party may be
amended or waived only by an instrument in writing signed by the parties hereto
or thereto, as applicable, which instrument shall be in form, scope and
substance satisfactory to Bank and shall be subject to such conditions and/or
requirements as Bank shall require.

Section 12.8 Interest. It is the intent of Bank and Borrower in
the execution, delivery and performance of this Agreement and all other Loan
Documents, and all matters incidental and related hereto and thereto and
arising herefrom and therefrom, to remain in strict compliance with Applicable
Law from time to time in effect, including without limitation, usury laws. In
furtherance thereof, Bank and Borrower stipulate and agree that none of the
terms and provisions contained in, or pertaining to, the Loan Documents shall
ever be construed to create a contract to pay for the use or forbearance or
detention of money with interest at a rate or in an amount in excess of the
Maximum Rate or maximum amount of interest permitted or allowed to be
contracted for, charged, received, taken or reserved under said laws. For
purposes of each Loan Document, interest shall include the aggregate of all
amounts which constitute or are deemed to constitute interest under the laws of
the State of Texas or, to the extent they may apply, the laws of the United
States of America, that are contracted for, chargeable, receivable (whether
received or deemed to have been received), taken or reserved under each such
document. Neither Borrower nor any other Person shall ever be required to pay
unearned interest on the Loan Documents and shall never be required to pay
interest on the Loan Documents at a rate or in an amount in excess of the
Maximum Rate or maximum amount of interest that may be lawfully contracted for,
charged, received, taken or reserved under Applicable Law, and the provisions
of this paragraph shall control over all other provisions of the Loan
Documents. If the effective rate or amount of interest which would otherwise
be payable under the Loan Documents would exceed the Maximum Rate or maximum
amount of interest Bank or any other holder of the Credit Note or other
Obligations is allowed by Applicable Law to charge, contract for, take, reserve
or receive, or in the event Bank or any holder of the Credit Note or other
Obligation shall charge, contract for, take, reserve or receive monies that are
deemed to constitute interest which

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would, in the absence of this provision, increase the effective rate or amount
of interest payable under the Loan Documents to a rate or amount in excess of
that permitted or allowed to be charged, contracted for, taken, reserved or
received under Applicable Law then in effect, then the principal amount of the
Credit Note or other Obligations or the amount of interest which would
otherwise be payable thereunder shall be payable at, or reduced to, as
applicable, the maximum amount allowed pursuant to the then applicable
indicated (weekly) rate ceiling referred to hereinabove at the definition of
the term Applicable Law, or if no such ceiling is then in effect, as authorized
and allowed under said laws as now or hereafter construed by the courts having
jurisdiction, and all such monies so charged, contracted for, received, taken
or reserved that are deemed to constitute interest in excess of the Maximum
Rate or maximum amount of interest permitted by Applicable Law shall be
immediately returned to or credited to the account of Borrower upon such
determination. All amounts paid or agreed to be paid in connection with the
Credit Note or other Obligations which would under Applicable Law be deemed
interest shall, to the maximum extent not prohibited by Applicable Law, be
amortized, prorated, allocated and spread throughout the full term of this
Agreement or the Credit Note, as the case may be.

Section 12.9 Notices. All notices and other communications
provided for herein (including, without limitation any modifications of, or
waivers or consents under, this Agreement) shall be given or made by telex,
telegraph, telecopy, cable, or in writing and telexed, telecopied, telegraphed,
cabled, mailed, or delivered to the attention of an Authorized Representative
of the intended recipient at the Address for Notices specified below its name
in the signature pages hereof; or, as to any party, at such other address as
shall be designated by such party in a notice to each other party given in
accordance with this Section. Except as otherwise provided in this Agreement,
all such communications shall be deemed to have been duly given or made when
transmitted by telex or telecopy to the attention of an Authorized
Representative of the intended recipient, subject to telephone confirmation of
receipt by any Person, or delivered to the telegraph or cable office, subject
to telephone confirmation of receipt by any Person, or when personally
delivered or, in the case of a mailed notice certified mail return receipt
requested, within three (3) Business Days of the day when duly deposited in the
mails, in each case given or addressed to the attention of an Authorized
Representative of the intended recipient as aforesaid; provided, however,
notices to Bank pursuant to Article B shall not be effective until received by
Bank.

Section 12.10 Applicable Law. THIS AGREEMENT AND THE OTHER LOAN
DOCUMENTS (EXCEPT TO EXTENT OTHERWISE EXPRESSLY PROVIDED IN ANY OF THEM) SHALL
BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS
AND TO THE EXTENT APPLICABLE, LAWS OF THE UNITED STATES OF AMERICA; PROVIDED
HOWEVER, THE PROVISIONS OF CHAPTER 15 OF THE TEXAS CREDIT CODE (VERNON'S TEXAS
CIVIL STATES, ARTICLE 5069-15) ARE SPECIFICALLY DECLARED BY THE PARTIES HERETO
NOT TO BE APPLICABLE TO THIS AGREEMENT OR ANY OF THE OTHER LOAN DOCUMENTS OR TO
THE

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TRANSACTIONS CONTEMPLATED HEREBY. THIS AGREEMENT AND EACH OF THE OTHER LOAN
DOCUMENTS HAVE BEEN ENTERED INTO IN HARRIS COUNTY, TEXAS, AND EACH SHALL BE
PERFORMABLE BY THE BORROWER FOR ALL PURPOSES IN HARRIS COUNTY, TEXAS.

Section 12.11 Submission to Jurisdiction; Waivers. TO THE MAXIMUM
EXTENT NOT EXPRESSLY PROHIBITED BY APPLICABLE LAW FROM TIME TO TIME IN EFFECT,
BORROWER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY (AND AFTER IT HAS
CONSULTED WITH ITS OWN ATTORNEY) IRREVOCABLY AND UNCONDITIONALLY:

(a) SUBMITS FOR ITSELF AND ITS PROPERTY IN ANY LEGAL
ACTION OR PROCEEDING RELATING TO THE LOAN DOCUMENTS OR FOR
RECOGNITIONS AND ENFORCEMENT OF ANY JUDGMENT IN RESPECT THEREOF, TO
THE NON-EXCLUSIVE GENERAL JURISDICTION OF THE COURTS OF HARRIS COUNTY,
TEXAS, THE COURTS OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN
DISTRICT OF TEXAS, HOUSTON DIVISION, AND APPELLATE COURTS FORM ANY
THEREOF;

(b) CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY BE
BROUGHT IN SUCH COURTS, AND WAIVES ANY OBJECTION THAT IT MAY NOW OR
HEREAFTER HAVE TO THE VENUE OR ANY SUCH ACTION OR PROCEEDING IN ANY
SUCH COURT OR THAT SUCH ACTION OR PROCEEDING WAS BROUGHT IN AN
INCONVENIENT COURT AND AGREES NOT TO PLEAD OR CLAIM THE SAME;

(c) AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR
PROCEEDING MAY BE EFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR
CERTIFIED MAIL, RETURN RECEIPT REQUESTED (OR ANY SUBSTANTIALLY SIMILAR
FORM OF MAIL), POSTAGE PREPAID, TO SUCH PERSON AT ITS ADDRESS FOR
NOTICES REFERRED TO IN SECTION 12.9 HEREOF, ATTENTION TO AN AUTHORIZED
REPRESENTATIVE OF SUCH PERSON (WITH COPY THEREOF, SO MAILED, TO
ORLOFF, LOWENBACH, STIFELMAN & SIEGEL, P.A., 101 EISENHOWER PARKWAY,
ROSELAND, NEW JERSEY 07068-1082, ATTENTION: MR. RALPH M. LOWENBACH)
OR AT SUCH OTHER ADDRESS OR ADDRESSES OF WHICH BANK SHALL HAVE BEEN
NOTIFIED PURSUANT HERETO;

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(d) AGREES THAT NOTHING HEREIN SHALL AFFECT THE RIGHT TO
EFFECT SERVICE OF PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR
SHALL LIMIT THE RIGHT TO SUE IN ANY OTHER JURISDICTION; AND

(e) IN RECOGNITION THAT IT MAYBE ENTITLED TO A TRIAL IN
WHICH MATTERS OF FACT ARE DETERMINED BY A JURY (AS OPPOSED TO A TRIAL
IN WHICH SUCH MATTERS ARE DETERMINED BY A PRESIDING JUDGE), WAIVES ANY
RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT TO ANY LITIGATION
DIRECTLY OR INDIRECTLY AT ANY TIME ARISING OUT OF, UNDER, OR IN
CONJUNCTION WITH, ANY OF THE LOAN DOCUMENTS, OR ANY OF THE
TRANSACTIONS PROVIDED FOR HEREIN OR THEREIN OR CONTEMPLATED HEREBY OR
THEREBY, WHETHER BEFORE OR AFTER MATURITY AND WHETHER OR NOT COMMENCED
BY OR AGAINST IT.

Section 12.12 Counterparts. This Agreement may be executed in one
or more counterparts, and by each party hereto on separate counterparts, each
of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.

Section 12.13 Severability. If any provision of this Agreement or
any other Loan Document is held to be illegal, invalid or unenforceable under
present or future laws, such provision shall be fully severable to the extent
required by the jurisdiction whose laws rendered such provision illegal,
invalid or unenforceable; and the remaining provisions of this Agreement and of
each of the other Loan Documents and, if not affected by the laws of the
jurisdiction rendering such provision illegal, invalid or unenforceable, then,
as to all other jurisdictions, all provisions hereof and thereof, shall remain
in full force and effect and shall not be affected by such provision or by its
severance. Upon any one or more provisions of this Agreement or any other Loan
Document being held illegal, invalid or unenforceable, the parties hereto agree
promptly to meet and to negotiate a replacement provision or provisions as
similar as possible to that which it replaces, and until such negotiation is
completed, each party hereto hereby agrees that there shall be deemed
automatically included in such document a provision or provisions as similar in
terms to such illegal, invalid or unenforceable provision as may be legal,
valid and enforceable. In furtherance of the foregoing, but in no manner
limiting the generality thereof, to the extent that the undertaking to
indemnify, pay and hold harmless set forth in any section or provision of this
Agreement or any other Loan Document may be unenforceable because it is
violative of any law or public policy as determined by the final unappealable
judgment or order of a court of competent jurisdiction, each indemnifying party
agrees, jointly and severally, that it shall contribute the maximum portion
which it is permitted to pay and satisfy under applicable law, to the payment
and satisfaction of all such indemnified matters incurred by the applicable
indemnitees.

Section 12.14 Participations.

61
<PAGE> 67
(a) Bank shall have the right, at any time and from time to
time, to grant participations in, and make assignments of, the Credit Note and
any other Loan Documents, and to the extent of each such participation or
assignment, the provisions of the Loan Documents shall inure to the benefit of
such participants and assigns; provided, however, promptly following each such
participation, Bank shall notify Borrower of the identity of the participant,
and prior to each assignment, Bank shall notify Borrower of the identity of the
proposed assignee, and if Borrower consents to such assignment (the consent
therefor not being unreasonable or untimely withheld by Borrower), Bank may
consummate such assignments; provided, however, no participant or assignee
shall be entitled to increased costs of the nature described in Article V in
excess of the amount of increased costs to which Bank would have been entitled
pursuant to Article V. Each actual or proposed participant or assignee shall
be entitled to receive all information received by Bank pursuant to, and in
connection with, the Loan Documents, and the transactions contemplated thereby,
including, but without limitation, information regarding the creditworthiness
of Borrower and KCS and the information required to be disclosed to a
participant pursuant to Banking Circular 181 (Rev., August 2, 1984), issued by
the Office of the Comptroller of Currency (whether the actual or proposed
participant is subject to the circular or not). Further, in regard to each
participant and assignee, Borrower and KCS agree that each such Person shall
have, and grants to each such Person, to the extent of its participation and
assignment, the right to set-off deposit accounts maintained by any of them
with such participant or assignee to at least the same extent as granted to
Bank hereunder.

(b) In no event shall Bank agree with any participant to take
or refrain from taking any action hereunder or under any other Loan Document
except that Bank may agree with such Participant that it will not, without the
consent of such Participant, agree to any one or more of the following: (i)
increase or extend the term, or extend the time or waive any requirement for
the reduction or termination, of the Credit Commitment, (ii) extend the date
fixed for the payment of any principal of or interest on the Total Credit
Principal (iii) reduce the rate at which interest is payable thereon, or any
fee hereunder payable to such participant, to a level below the rate at which
such participant is entitled to receive such interest or fee, (iv) alter the
rights or obligations of Borrower to prepay the related Advances, (v) release
all or substantially all of the Collateral, (vi) discharge or compromise, as to
the Obligations or any substantial portion thereof, (vii) release KCS from the
Guaranty, or (viii) amend the provisions of this Section 12.14(b).

Section 12.15 Governmental Regulation. Anything contained in this
Agreement or any other Loan Document to the contrary notwithstanding, Borrower
acknowledges and agrees that Bank shall not be obligated (i) to extend or fund
any credit or other financial accommodation to, or for the benefit of, Borrower
in an amount, or (ii) to perform any other agreement or obligation to, or for
the benefit of, Borrower in any regard, in contradiction or violation of any
limitation or prohibition provided by any applicable statute or regulation, or
any interpretation, ruling, decision, opinion or

62
<PAGE> 68
other pronouncement in respect thereto (whether or not having the effect of
law), which Bank believes is applicable.

Section 12.16 Conflicting Provisions. The provisions of this
Agreement shall be in addition to those of any other evidence of liability held
by Bank in connection with the Obligations and the other Loan Documents, and
all such documents shall be construed as complementary to each other. Should
any provision contained in any other agreement between Bank and Borrower
conflict with this Agreement (except with respect to one or more different
jurisdictions of governing law as therein expressly provided), the provisions
contained in this Agreement shall control; and further, in the event that there
exist provisions in the Loan Documents to which Borrower is a party, which are
similar in context, scope, subject matter or content, but not identical, same
shall be construed as complementary to, and cumulative with, each other, and
not, in whole or part, exclusive or mutually exclusive of one another.

Section 12.17 Strict Compliance. If any action or failure to act
by Borrower violates any covenant or obligation of Borrower herein or in
another loan Document, then such violation shall not be excused by the fact
that such action or failure to act would otherwise be permitted by any other
covenant (or exception to any covenant) herein or therein contained other than
the covenant violated.

Section 12.18 No Control. None of the covenants, terms or other
provisions of this Agreement or any other Loan Document or any document
executed in conjunction herewith or therewith or related hereto or thereto
shall, or shall be deemed to, give Bank the rights or powers to exercise
control over, or participate in the management of, the business, affairs,
operations or management (financial or otherwise) of Borrower or any of its
Subsidiaries, including, without limitation, any right or power to influence or
affect any treatment of hazardous wastes or hazardous waste disposal decisions;
any and all implications or inferences regarding the existence of any such
rights or powers are hereby expressly negated. The relationship between Bank
and Borrower created by this Agreement and each of the other Loan Documents is
only that of creditor-debtor and Lien holder-Lien grantor as applicable, and
the rights, remedies, Liens and powers of Bank hereunder and thereunder are
limited to the rights to receive payment of the Obligations and to exercise the
Liens, rights, powers and remedies provided herein and therein and in any other
document executed in conjunction herewith or therewith or related hereto or
thereto.

Section 12.19 Confidentiality. Bank agrees that it will use its
best effort not to disclose any information furnished to it directly by
Borrower or KCS, which is furnished pursuant to this Agreement, provided that
Bank may disclose any such information (i) to employees, officers and board
members of, counsel for, and other advisors, accountants, auditors, and
consultants, to Bank and Bank's holding or parent company (ii) as may be
required to comply with any law, statute, decision, order, rule, ruling or
regulation applicable to Bank; (iii) as may be agreed to in advance by Borrower
or by KCS, as applicable, (iv) which is or becomes generally available to the
public; (v) as

63
<PAGE> 69
may be required or appropriate in any report, statement or testimony submitted
to any municipal, state, federal or regulatory body having or claiming to have
jurisdiction over Bank; (vi) as may be required or appropriate in response to
any summons, subpoena or other legal process or in connection with any
litigation, or (vii) in connection with any assignment, prospective assignment,
sale, prospective sale, participation or prospective participation of Bank's
interest hereunder provided that any such assignee, prospective assignee,
purchaser, prospective purchaser, participant, or prospective participant shall
have entered into a confidentiality agreement with Borrower and KCS or for
their benefit substantially upon the terms of this Section 12.19. Unless
giving prior notice is not practical under the circumstances or is in violation
of law, rule, regulation or order, as each of the foregoing determinations is
determined by Bank, Bank shall endeavor to give Borrower or KCS, as applicable,
prior notice before disclosing information as permitted pursuant to clauses
(ii), (v) and (vi) above.

Section 12.20 Bank as Sole Beneficiary. All conditions of the
obligations of Bank to make Advances hereunder and all covenants, warranties,
representations, and other terms and provisions of, and applicable to, Borrower
are imposed solely and exclusively for the benefit of Bank and its successors
and assigns, and no other Person shall have standing to require satisfaction of
such conditions in accordance with their terms or be entitled to assume that
Bank will refuse to make such Advances in the absence of strict compliance with
any or all of such conditions, and no other Person shall, under any
circumstances, be deemed to be a beneficiary of such conditions, covenants,
warranties, representations and other terms and provisions. Any of such
conditions, and the breach of, or noncompliance with, any such covenants,
warranties, representations and other terms and provisions may be freely waived
in whole or in part by Bank (subject to Section 12,14(b)) at any time if in its
sole discretion it deems it advisable to do so. No such conditions, covenants,
warranties, representations or other terms or provisions are intended to
release, or authorize or permit a breach by Borrower of any of its obligations
and requirements to any third Person, or any noncompliance therewith, or to
evidence the contractual interference therewith by Bank.

Section 12.21 Construction. Borrower acknowledges that it has had
the benefit of legal counsel of its own choice and has been afforded an
opportunity to review this Agreement and the other Loan Documents with its
legal counsel and that this Agreement and the other Loan Documents shall be
construed as if jointly drafted by each of them.

Section 12.22 Entire Agreement. THIS WRITTEN LOAN AGREEMENT
REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED
BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE
PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

64
<PAGE> 70
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.

KCS ENERGY MARKETING, INC.

By
----------------------------------------
Harry Lee Stout, President

Address for Notices:

KCS Energy Marketing, Inc.
379 Thornall Street
Edison, New Jersey 08837
Attn: An Authorized Representative (as herein
defined and addressed as expressly required hereby)
Telecopy: (908) 603-8960

Principal Place of Business:

1800 West Loop South, Suite 1400
Houston, Texas 77027

65
<PAGE> 71
"BANK"

COMERICA BANK-TEXAS

By
-------------------------------------
Name: Daniel G. Steele
Title: Vice President

Address for Notices:

Post Office Box 4167
Houston, Texas 77210-4167 (MAILING)
One Shell Plaza
910 Louisiana, Suite 410
Attn: Mr. Daniel G. Steele
Telecopy: (713) 722-6540

With a copy to:

Comerica Bank-Texas
1300 Northpark Center, Fourth Floor
Dallas, Texas 75225

Attention: Mr. Mark Fuqua

66
<PAGE> 72
SCHEDULE 1

Mortgaged Properties

I.
Production Payments

A. That certain production payment established and conveyed by Hall-Houston
Oil Company to Borrower pursuant to that certain Conveyance of Production
Payment dated as of September 30, 1994, and/or that certain Amended and
Restated Conveyance of Production Payment, dated as of October 31, 1994 as
amended by that certain First Amendment to Amended and Restated Conveyance of
Production Payment dated as of January 12, 1995, covering Hall-Houston Oil
Company's interests in the following oil and gas leases and lands:

1. West Cameron Area, Block 342: Oil and Gas Lease bearing Serial
No. OCS-G 10576 effective July 1, 1989 between the United States of
America, as Lessor, and Hall-Houston Oil Company, as Lessee, covering all
of Block 342, West Cameron Area, West Addition, OCS Leasing Map, Louisiana
Map No. 1A, containing approximately 5,000 acres.

2. West Cameron Area, Block 359: Oil and Gas Lease bearing Serial
No. OCS-G 14329 effective May 1, 1994 between the United States of America,
as Lessor, and Hall-Houston Oil Company, as Lessee, covering all of Block
359, West Cameron Area, West Addition, OCS Leasing Map, Louisiana Map No.
1A, containing approximately 5,000 acres.

3. Mustang Island Area, Block 783: Oil and Gas Lease bearing
Serial No. OCS-G 14104 effective November 1, 1993 between the United States
of America, as Lessor, and Hall-Houston Oil Company, Global Natural
Resources Corporation of Nevada and Santa Fe Minerals, Inc., as Lessee,
covering all of Block 783, Mustang Island Area, OCS Leasing Map, Texas Map
No. 3.

4. West Delta Area, Block 94: Oil and Gas Lease bearing Serial No.
OCS 0839 effective May 1, 1960 between the United States of America, as
Lessor, and Continental Oil Company, The Atlantic Refining Company, Cities
Service Production Company and Tidewater Oil Company, as Lessee, as
assigned to Hall-Houston Oil Company by Assignment of Operating Rights
dated December 15, 1994, but effective as of September 20, 1994, executed
by Conoco, Inc., OXY USA Inc., Vastar Resources, Inc. and Texaco
Exploration and Production, Inc., as Assignors, to be recorded in
Plaquemines Parrish, Louisiana, INSOFAR AND ONLY INSOFAR as said lease
covers the S/2 of Block 94, West Delta Area, as shown on the official
leasing map La. No. 8, Outer Continental Shelf Leasing Map (Louisiana
offshore operations), limited in depth from the surface of the Earth down
to and including 7,369 feet subsea.

1
<PAGE> 73
5. West Delta Area, Block 95: Oil and Gas Lease bearing Serial No.
OCS-G 1497 effective December 1, 1966 between the United States of America,
as Lessor, and Continental Oil Company, Cities Service Oil Company,
Tidewater Oil Company and Atlantic Richfield Company, as Lessee, as
assigned to Hall-Houston Oil Company by two separate Assignments of
Operating Rights, each dated December 15, 1994, but effective as of
September 20, 1994, executed by Conoco Inc., OXY USA Inc., Vastar
Resources, Inc. and Texaco Exploration and Production Inc., as Assignors,
to be recorded in Plaquemines Parrish, Louisiana, INSOFAR AND ONLY INSOFAR
as said lease covers: (a) the S/2SE/4; S/2N/2SE/4; SE/4SW/4; and
S/2SW/4SW/4 of Block 95, West Delta Area, Official Leasing Map, Louisiana
Map No. 8, limited in depth from the surface of the Earth down to and
including 7,369 feet subsea; and (b) that portion of the S/2 of Block 95,
West Delta Area, Official Leasing Map, Louisiana Map No. 8, LESS AND EXCEPT
the S/2SE/4; S/2N/2SE/4; SE/4SW/4; and S/2SW/4SW/4 thereof, AND LIMITED (i)
to the acreage upthrown to the major down to the North (DTTN) "W" fault as
confirmed by that six hundred sixty feet (660') of missing section in the
Conoco West Delta 94 No. 2 Well as correlated against the Conoco West Delta
95 T No. 1 Well and (ii) in depth from the surface of the Earth down to and
including 7,369 feet subsea

6. Ship Shoal Area, Block 184: Oil and Gas Lease bearing Serial No.
OCS-G 12947, effective May 1, 1991, between the United States of America,
as Lessor, and Agip Petroleum Co., Inc., as Lessee, covering all of Block
184, Ship Shoal Area, OCS Leasing Map, Louisiana Map No. 5, containing
approximately 5,000 acres, insofar and only insofar as said lease is
limited in depth from the surface to 100 feet below the stratigraphic
equivalent of 8,615 feet subsea in the OCS-G 12947 Well #1.

Such Conveyance of Production Payment is recorded in the following records:

<TABLE>
<CAPTION>
COUNTY, STATE RECORDING DATA
------------- --------------
<S> <C>
Nueces County, Texas Official Public Records; Clerk's
Document No. 933152

Aransas County, Texas Official Public Records; Clerk's
File No. 197253; Image No.
212062

Jefferson Parish, Louisiana MLBook 135, Folio 470 of Mineral
Records; Clerk's Entry No. 56964

Plaquemines Parish, Louisiana C.O.B. No. 845, Folio 651 of
Parish Records

Cameron Parish, Louisiana Book 803 of Conveyance Records;
Clerk's File No. 238074
</TABLE>

2
<PAGE> 74
Such Amended and Restated Conveyance of Production Payment is recorded in the
following records:

<TABLE>
<CAPTION>
COUNTY, STATE RECORDING DATA
------------- --------------
<S> <C>
Nueces County, Texas Official Public Records; Clerk's
Document No. 936047

Aransas County, Texas Official Public Records; Clerk's
File No. 197575; Image No.
213305

Jefferson Parish, Louisiana MLBook 135, Folio 484 of Mineral
Records; Clerk's Entry No. 60586

Plaquemines Parish, Louisiana C.O.B. No. 847, Folio 184 of
Parish Records

Cameron Parish, Louisiana Book 805 of Conveyance Records;
Clerk's File No. 238332

Terrebonne Parish, Louisiana Conveyance Records; Clerk's
Entry No. 946412
</TABLE>

B. That certain production payment established and conveyed by Offshore Gas
Partners, L.C. and The Offshore Group, Inc. to Borrower pursuant to that
certain Conveyance of Production Payment dated as of August 1, 1994, recorded
in Volume 4186, Page 0954 of the Real Property Records of Mobile County,
Alabama, covering Offshore Gas Partners, L.C. and The Offshore Group, Inc.'s
interests in the following oil and gas leases and lands:

1. Oil and Gas Lease No. 682, dated February 23, 1988, from the
State of Alabama, acting by and through its Commissioner of the Department
of Conservation and Natural Resources, as Lessor, to Atlantic Richfield
Company, as Lessee, recorded in Volume No. 3254, Page 278 of the Official
records of Mobile County, Alabama, and covering 1,291.25 acres, more or
less. The gross leasehold working interest estate and operating rights
interest of Grantor in this Oil and Gas Lease is 97.5%, and the
corresponding net revenue interest of Grantor in this Oil and Gas Lease is
an undivided 71.175%.

2. Oil and Gas Lease No. 683, dated February 23, 1988, from the
State of Alabama, acting by and through its Commissioner of the Department
of Conservation and Natural Resources, as Lessor, to Atlantic Richfield
Company, as Lessee, recorded in Volume No. 3254, Page 379 of the official
records of Mobile County, Alabama, covering 1,291.25 acres, more or less.
The gross leasehold working interest estate and operating rights interest
of Grantor in this Oil and Gas Lease is 100%, and the corresponding net
revenue interest of Grantor in this Oil and Gas Lease is an undivided
71.0%.

3
<PAGE> 75
II.
Production and Delivery Agreements

A. Production and Delivery Agreement dated September 30, 1994 by and between
Borrower and Hall-Houston Oil Company, as amended by First Amendment to
Production and Delivery Agreement dated as of October 31, 1994 executed
pursuant to that certain Purchase and Sale Agreement dated September 30, 1994
between Borrower and Hall-Houston Oil Company, as amended by First Amendment to
Purchase and Sale Agreement dated as of October 31, 1994.

B. Production and Delivery Agreement dated as of December 1, 1993, by and
between Offshore Gas Partners, L.C., The Offshore Group, Inc. and Borrower, and
recorded in Volume 4186, Page 0967, of the Real Property Records of Mobile
County, Alabama.

III.
Deeds of Trust

A. Deed of Trust, Security Agreement, Financing Statement and Assignment of
Production dated and effective September 30, 1994, between Hall-Houston Oil
Company, as Mortgagor and Debtor, and Borrower, as Mortgagee and Secured Party;
and Deed of Trust, Security Agreement, Financing Statement and Assignment of
Production dated and effective October 31, 1994, between Hall-Houston Oil
Company, as Mortgagor and Debtor, and KCS Energy Marketing, Inc., as Mortgagee
and Secured Party, such Deeds of Trust being recorded in the following records:

<TABLE>
<CAPTION>
COUNTY, STATE RECORDING DATA
------------- --------------
<S> <C>
Official Public Records; Clerk's
Nueces County, Texas Document No. 936048

Official Public Records; Clerk's
Aransas County, Texas File No. 197574; Image No. 213278

Official Public Records; Clerk's
Nueces County, Texas Document No. 933153

Official Public Records; Clerk's
Aransas County, Texas File No. 197252; Image No. 212038
</TABLE>

4
<PAGE> 76
B. Act of Mortgage and Security Agreement dated and effective September 30,
1994, between Hall-Houston Oil Company, as Mortgagor, and KCS Energy Marketing,
Inc., as Mortgagee; and Act of Mortgage and Security Agreement dated and
effective October 31, 1994, between Hall-Houston Oil Company, as Mortgagor, and
KCS Energy Marketing, Inc., as Mortgagee, such Mortgages being recorded in the
following records:

<TABLE>
<CAPTION>
COUNTY, STATE RECORDING DATA
------------- --------------
<S> <C>
Jefferson Parish, Louisiana MB Book 3674, Folio 884 of
Mortgage Records; Clerk's Entry
No. 60587

Plaquemines Parish, Louisiana M.O.B. No. 241, Folio 370 of
Mortgage Records

Cameron Parish, Louisiana Book 204 of Mortgage Records;
Clerk's File No. 238333
Terrebonne Parish, Louisiana Mortgage Records; Clerk's Entry
No. 946413

Jefferson Parish, Louisiana MB Book 3672, Folio 377 of
Mortgage Records; Clerk's Entry
No. 56965

Plaquemines Parish, Louisiana M.O.B. No. 240, Folio 710 of
Mortgage Records

Cameron Parish, Louisiana Book 203 of Mortgage Records;
Clerk's File No. 238075
</TABLE>

5
<PAGE> 77
SCHEDULE 2

Credit Borrowing Base Reduction Amount

<TABLE>
<CAPTION>
DATE AMOUNT OF REDUCTION
---- -------------------
<S> <C>
April 1, 1995 $2,000,000.00

July 1, 1995 $2,000,000.00

October 1, 1995 $2,000,000.00

January 1, 1996 $2,000,000.00

April 1, 1996 $2,000,000.00

July 1, 1996 $2,000,000.00

October 1, 1996 $2,000,000.00

January 1, 1997 $2,000,000.00

April 1, 1997 $2,000,000.00

July 1, 1997 $2,000,000.00

October 1, 1997 $2,000,000.00
</TABLE>

6
<PAGE> 78
SCHEDULE 3

Litigation; Judgments

(1) No. 93-65292; KCS Energy Marketing, Inc. vs. The Polaris Pipeline
Corporation; In the 270th Judicial District Court of harris County, Texas.
The plaintiff seeks payment due on a natural gas account of approximately
$53,000, court costs, attorneys fees, and punitive damages based on
defendant's fraudulent conduct.

(2) No. 94-1706; KCS Energy Marketing, Inc. vs. Federal Energy Regulatory
Commission; In the United States Court of Appeals for the District of
Columbia Circuit. Petitioner seeks review and reversal of three FERC
Orders denying Petitioner a refund of PSP charges previously paid to
Transcontinental Gas Pipe Line Corporation.

7
<PAGE> 79
SCHEDULE 4

Existing Debt

(1) Loan Agreement dated as of January 11, 1995 among KCS Energy Marketing,
Inc., as Borrower, KCS Energy, Inc. and Proliq, Inc., each as a Guarantor
and Canadian Imperial Bank of Commerce, as Lender.

(2) Any subsequent credit facility, provided however, that the credit facility
is designed to replace the agreement specified under the above item 1 of
this schedule and that such new facility does not change the purpose for
which the Debt was incurred or the nature of the collateral for such Debt.

(3) Any indebtedness representing the deferred payment of the purchase price of
a volumetric production payment.

8
<PAGE> 80
SCHEDULE 5

Subsidiaries

KCS Energy Marketing, Inc. currently owns no subsidiary companies.

9
<PAGE> 81
SCHEDULE 6

Existing Liens

None

10
<PAGE> 82
SCHEDULE 7

Taxes Contested in Good Faith

None

11
<PAGE> 83
SCHEDULE 8

Trade Names

KCS Energy Marketing, Inc. transacts business in the state of New Jersey under
the following assumed name:

KCS Energy Management Services, Inc.

12
<PAGE> 84
SCHEDULE 9

Make-Up/Gas Imbalance

There are currently no gas imbalances with respect to the production payment
and excess gas delivered from the Mortgaged Properties.

13
<PAGE> 85
SCHEDULE 10

Production and Delivery Agreements

14
<PAGE> 86
SCHEDULE 11

Title Curative Requirements

1. Amended and Corrected Assignments from Conoco, Inc. et al to Hall Houston
Oil Company covering West Delta Area Block 94 (OCS-0839) and West Delta
Area Block 95 (OCS-G1497);

2. Amended and Corrected Conveyance of Production Payment from Hall Houston
Oil Company to KCS Energy Marketing, Inc. covering the property described
in 1 above;

3. Any requirements specified in post closing title opinions delivered by KCS
Energy Marketing, Inc. to Comerica Bank-Texas covering production payments
pledged to Comerica Bank-Texas.

15
<PAGE> 87
SCHEDULE 12

Claims Against Mortgaged Properties

There are no claims in respect of the Mortgaged Properties to the best of
the Borrower's knowledge and belief.

16
<PAGE> 88
SCHEDULE 13

Existing Loans, Advances, Investments

1. 1,127 Shares of National Gypsum Common Stock

17
<PAGE> 89
SCHEDULE 14

Environmental Matters

KCS Energy Marketing, Inc. ("Borrower") is a marketer of natural gas. The
Borrower's natural gas marketing activities include: buying natural gas,
acquiring natural gas supplies by means of production payments, arranging for
and monitoring transportation of natural gas by various intrastate and
interstate pipeline systems, hedging natural gas purchase and sales
transactions on the New York Mercantile Exchange, and accounting for and
invoicing for said natural gas purchase and sales transactions. These
activities take place primarily in the Borrower's main office in Houston,
Texas or in one of the Borrower's three satellite offices in Edison, New
Jersey, Buffalo, New York or Belle Vernon, Pennsylvania. Borrower does not own
or operate any oil or natural gas wells, gathering facilities or appurtenant
equipment which could be the source of environmental responsibility.

18
<PAGE> 90
SCHEDULE 15

Current Purchasers of Production

<TABLE>
<CAPTION>
COMPANY MMBTU
<S> <C>
O&R Energy Development, Inc.
28 West Grand Ave.
Montvale, NJ 07645 42,900
Attn: Brian Kelly

Associated Gas Services, Inc.
10777 Westheimer 3,900
Houston, TX 77042
Attn: Accounts Payable

Coastal Gas Marketing
9 Greenway Plaza - 22nd Floor 3,900
Houston, TX 77046-0995
Attn: Barbara Parker

Channel Gas Marketing
P.O. Box 2511
Houston, TX 77252-2511 66,150
Attn: Accounts Payable

Enron Industrial Natural Gas Company
Gas Purchase Accounting 7,167
P.O. Box 1188
Houston, TX 77251-1188

Tejas Power Corporation
200 Westlake Park Blvd. 7,167
Houston, TX 77079
Attn: Elizabeth Eubank

Western Gas Resources, Inc.
12200 N. Pecos
Denver, CO 80234 4,747
Attn: Cheryl Chesmore

Coast Energy Group, Inc.
9494 Southwest Freeway 237,000
Houston, TX 77074
Attn: Accounts Payable
</TABLE>

19
<PAGE> 91
EXHIBIT A

CREDIT NOTE

20
<PAGE> 92
EXHIBIT B

ADVANCE REQUEST FORM

21
<PAGE> 93
EXHIBIT C-1

OIL AND GAS MORTGAGE - TEXAS

22
<PAGE> 94
EXHIBIT C-2

OIL AND GAS MORTGAGE - LOUISIANA

23
<PAGE> 95
EXHIBIT C-3

OIL AND GAS MORTGAGE - ALABAMA

24
<PAGE> 96
EXHIBIT D

GUARANTY

25
<PAGE> 97
EXHIBIT E

LETTER TRANSFER ORDER

<PAGE> 1

Exhibit 10.2

GUARANTY AGREEMENT

THIS GUARANTY AGREEMENT (the "Guaranty Agreement"; other terms used
herein shall have the meanings assigned thereto in Article I of this Guaranty
Agreement) dated as of January 12, 1995, is made by KCS ENERGY, INC., a
Delaware corporation ("KCS") and PROLIQ, INC., a New Jersey corporation
("Proliq"), in favor of COMERICA BANK-TEXAS, a Texas banking corporation
("Bank").

RECITALS

KCS Energy Marketing, Inc., a New Jersey corporation (the "Borrower"),
KCS and Proliq have requested that Bank provide for the extension of credit to
the Borrower, in an aggregate principal amount of up to but not exceeding
$25,000,000, and Bank is prepared to extend such credit upon the terms and
subject to the conditions set forth in a Credit Agreement dated as of even date
herewith between the Borrower and Bank (the "Credit Agreement") and as
hereinafter set forth. Further, KCS and Proliq acknowledge that the operations
and Properties (as defined in the Credit Agreement) of the Borrower are and
will be beneficial to the operations and Properties of KCS and Proliq.

To induce Bank to enter into, and to extend financial accommodations
and to make the loans provided for by the Credit Agreement, Bank requires that
the obligations of KCS and Proliq encompass and include the liabilities,
indebtedness and obligations now and hereafter existing and arising under and
in connection with the Credit Agreement, as the valid and subsisting
obligations of KCS and Proliq, and in furtherance thereof, but without limiting
the generality thereof, to induce Bank to enter into and perform the Credit
Agreement, Bank has requested and KCS and Proliq have agreed to enter into,
execute and deliver to Bank this Guaranty Agreement.

NOW, THEREFORE, (i) in consideration of the matters set forth in the
recitals hereinabove and in order to comply with the terms and conditions of
the Credit Agreement, (ii) to induce Bank to enter into and perform the Credit
Agreement, (iii) at the special insistence and request of Bank, and (iv) for
other good, fair and valuable consideration and reasonably equivalent value,
the receipt and sufficiency of which are hereby acknowledged by KCS and Proliq,
KCS and Proliq hereby agree as follows:
<PAGE> 2
ARTICLE I

GENERAL TERMS

Section 1.1 Terms Defined Above. As used in this Guaranty
Agreement, the terms defined hereinabove shall have such meanings when used
herein.

Section 1.2 Certain Terms Defined. As used in this Guaranty
Agreement, the following terms shall have the following meanings, unless the
context otherwise requires:

"Adjusted Consolidated Principal Debt" means an
amount, determined on a consolidated basis of KCS and its
Subsidiaries, equal to (without duplication) the sum of (i) an
amount equal to one-third (1/3) of the sum of the aggregate
outstanding principal amount of advances made under (a) that
certain Bank One Credit Note dated September 29, 1994 made by
KCS Resources, Inc. ("Resources") and KCS Pipeline Systems,
Inc. ("Pipeline") in favor of Bank One, in the original
principal amount of $50,000,000, and (b) that certain CIBC
Credit Note dated September 29, 1994 made by Resources and
Pipeline in favor of CIBC, Inc., in the original principal
amount of $50,000,000, and (ii) all current maturities of all
other long-term Debt.

"Authorized Representative" means, as to KCS, any of
the following Persons: James W. Christmas, President, Henry A.
Jurand, Vice President, Treasurer and Secretary, or C. R.
Devine, Vice President, Oil and Gas Operations; and in any
event, shall mean no other Persons except as modified pursuant
to a certificate sent to Bank signed by an Authorized
Representative of the Person with respect to which the
modification is to be effected, and in each such event, only
after Bank has had a reasonable opportunity to act upon such
written certification.

"Bank One" means Bank One, Texas, National
Association, a national banking association.

"Bank One Guaranty" means the March 15, 1994 Amended
and Restated Guaranty Agreement made by Guarantor in favor of
Bank One, guaranteeing obligations of KCS Resources Inc. and
KCS Pipeline Systems, Inc. described therein, as amended by
the September 29, 1994 First Amendment to Amended and Restated
Guaranty Agreement made by Guarantor in favor of Bank One and
CIBC, Inc..

"Bay Springs Subordinated Debt" means the Debt of
KRI, as successor by merger with Lenape, evidenced by that
certain Subordinated Non-Negotiable Promissory Note dated
January 1, 1993, payable to Esenjay Petroleum Corporation and
in the original principal amount of $5,560,500, together with
any and all renewals, extensions and rearrangements of such
Debt as expressly provided for in that certain

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<PAGE> 3
Letter Agreement dated as of February 26, 1993 (without regard
to any amendment or modification to such letter), between
Lenape and Esenjay Petroleum Corporation.

"Consolidated Cash Flow" means, for the four (4)
fiscal quarter periods then ended, an amount determined on a
consolidated basis of KCS and its Subsidiaries, equal to
(without duplication) the sum of (i) net income (reduced by
the matters set forth in clauses (i) through (v) in the
definition of Consolidated Net Income, to the extent each is
included in such net income), (ii) all deferred taxes,
including, but without limitation, federal income taxes, and
(iii) depreciation, depletion and amortization.

"Consolidated Current Assets" means, at any
particular time, all amounts which, in conformity with GAAP,
would be included as current assets on a consolidated balance
sheet of KCS and its Subsidiaries.

"Consolidated Current Liabilities" means, at any
particular time, all amounts which, in conformity with GAAP,
would be included on a consolidated balance sheet of KCS and
its Subsidiaries as current liabilities; provided, however,
current liabilities shall exclude current maturities of the
Bay Springs Subordinated Debt and the Guaranteed Obligations.

"Consolidated Current Ratio" means, at any particular
time, the ratio of Consolidated Current Assets to Consolidated
Current Liabilities, as such amounts are stated as of a
corresponding time.

"Consolidated Net Income" means, with respect to the
corresponding reporting period, the consolidated net earnings
of KCS and its Subsidiaries (stated as a positive amount) as
reflected in each of the periodic consolidated statements of
income of KCS and its Subsidiaries that KCS is required to
furnish Bank pursuant to the terms of this Guaranty Agreement,
but excluding therefrom to the extent included in the
calculation of each such net earnings, the following: (i) any
gain arising from the sale of capital assets, which sale does
not occur in the ordinary course of business of the Person
making such sale; (ii) any gain arising from any write-up of
assets; (iii) earnings of any other Person, substantially all
of the assets of which have been acquired by KCS or any of its
Subsidiaries in any manner, to the extent such earnings were
realized by such other Person prior to the date of such
acquisition; (iv) the earnings of any Person to which
substantially all of the assets of KCS or any of its
Subsidiaries shall have been sold, transferred or disposed of,
or into which KCS or its Subsidiaries shall have merged, to
the extent that such earnings were realized prior to the date
of such transaction; and (v) any gain arising from the
acquisition of any securities of KCS or its Subsidiaries.

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<PAGE> 4
"Consolidated Tangible Net Worth" means, at any
particular time, (i) all amounts which, in conformity with
GAAP, would be included as stockholders' equity on a
consolidated balance sheet of KCS and its Subsidiaries plus
(ii) the unamortized balance of investment tax credits plus
(iii) the unamortized balance of gain from the sale of Utility
Propane Company; provided, however, there shall be excluded
therefrom (without duplication): (A) any amount at which
shares of capital stock of KCS or any of its Subsidiaries
appear as an asset on such balance sheet, (B) goodwill,
including any amounts, however designated, that represent the
excess of the purchase price paid for assets or stock over the
value assigned thereto, (C) patents, trademarks, trade names,
copyrights, licenses, permits, franchises and research and
development expenses, (D) deferred assets and deferred
expenses, (E) unamortized debt discount and related expenses,
and (F) all other assets which are properly classified as
intangible assets.

"Debt" means for KCS and its Subsidiaries on a
consolidated basis (without duplication): (i) all
indebtedness, whether or not represented by bonds, debentures,
notes, securities or other evidences of indebtedness, for the
repayment of borrowed money, (ii) all indebtedness
representing deferred payment of the purchase price of
Property, assets or services, other than trade payables
incurred in the ordinary course of business, (iii) all
indebtedness under any lease which, in conformity with GAAP,
is required to be capitalized for balance sheet purposes, (iv)
all indebtedness under guaranties (other than guaranties by
KCS of trade payables of its Subsidiaries), endorsements
(other than for collection or deposit in the ordinary course
of business), assumptions, or other contingent obligations, in
respect of, or to purchase or otherwise acquire, indebtedness
of others, other than, as to KCS, a Subsidiary of KCS, (v) all
indebtedness secured by a Lien existing on Property owned by
the Person, whether or not the indebtedness secured thereby
shall have been assumed, the aggregate amount of such
indebtedness being equal to the lesser of (A) the aggregate
outstanding dollar amount of such indebtedness and (B) the
aggregate fair market value of such encumbered Property, (vi)
all indebtedness (whether contingent or otherwise) in respect
of letters of credit, bankers' acceptances, surety or other
bonds and similar instruments (other than contingent
indebtedness of the Borrower in respect of standby and/or
documentary letters of credit issued for the account of the
Borrower to secure the payment obligations of the Borrower
under specific natural gas purchase contracts entered into in
the ordinary course of business, which specific natural gas
purchase contracts are specifically dedicated to then in force
specific gas sales contracts of the Borrower; provided,
however that (1) the aggregate face amount of all such standby
letters of credit and documentary letters of credit
outstanding at any time shall not exceed $8,000,000, (2) no
such standby letter of credit or documentary letter of credit,
as applicable, shall (A) remain outstanding for a period in
excess of 60 days, with respect to a standby letter of credit,
or for period in excess of a normal and customary period for
documentary letters of credit issued in the ordinary course
for comparable transactions, with respect to a documentary

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<PAGE> 5
letter of credit, or (B) be guaranteed by any Person (other
than KCS) or secured by any Lien on any Property (other than
Property of the Borrower that is not Collateral) and (3) the
amount of any draw or other advance made under any such
standby letter of credit or documentary letter of credit, as
applicable, that is not reimbursed to the issuer of such
standby letter of credit or documentary letter of credit, as
applicable, within two Business Days after the date of such
draw or other advance shall thereafter constitute Debt until
such amount has been so reimbursed), (vii) all indebtedness
and undertakings to maintain or cause to be maintained the
financial position or financial covenants of any other Person
(other than, to the extent permitted, and in connection with,
the trade payables described in clause (iv) above), (viii) any
obligation to redeem or repurchase any of such Person's
capital stock, warrants, or stock equivalents, and (ix) the
Bay Springs Subordinated Debt, without reduction of any
amounts owed thereunder, including, without limitation, any
current maturities thereof.

"Debt to Capitalization Ratio" means, at any date,
the ratio of (i) the Debt of KCS and its Subsidiaries on a
consolidated basis to (ii) the sum of (a) the Debt of KCS and
its Subsidiaries taken on a consolidated basis and (b)
Consolidated Tangible Net Worth.

"Employee Plan" means an employee benefit plan or
other plan covered by Title IV of ERISA, other than a
Multiemployer Plan, and maintained or established in whole or
in part by KCS, any of its Subsidiaries or any ERISA
Affiliate.

"Environmental Laws" means any and all laws,
statutes, ordinances, rules, regulations, orders, requirements
or determinations of any Governmental Authority pertaining to
health or the environment in effect in any and all
jurisdictions in which KCS or any of its Subsidiaries is
conducting or at any time has conducted business, or where any
Property of KCS or any of its Subsidiaries, is located, or
where any hazardous substances generated by or disposed of by
KCS or any of its Subsidiaries, are located, including without
limitation, the Clean Air Act, as amended, the Comprehensive
Environmental, Response, Compensation and Liability Act of
1980, as amended ("CERCLA"), the Federal Water Pollution
Control Act, as amended, the Occupational Safety and Health
Act of 1970, as amended, the Resource Conservation and
Recovery Act of 1976, as amended ("RCRA"), the Safe Drinking
Water Act, as amended, the Toxic Substances Control Act, as
amended, the Superfund Amendments and Reauthorization Act of
1986, as amended, and other environmental conservation or
protection laws. The terms "hazardous substance", "release",
and "contaminants" have the meanings specified in CERCLA, and
the terms "solid waste", "hazardous waste" and "disposal" (or
"disposed") have the meanings specified in RCRA; provided,
however in the event either CERCLA or RCRA is amended so as to
broaden the meaning of any term defined thereby, such broader
meaning shall apply subsequent to the effective date of such
amendment with respect to all provisions of each Loan
Document, and provided further that, to the extent the laws of
the state in

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<PAGE> 6
which any Property of KCS or any of its Subsidiaries, is
located establish a meaning for "hazardous substance",
release", "solid waste" or "disposal" which is broader than
that specified in either CERCLA or RCRA, such broader meaning
shall apply with respect to such state.

"ERISA" shall have the meaning set forth in Section
3.11.

"ERISA Affiliate" means any corporation, trade or
business that is a member of the same controlled group of
corporations (within the meaning of Section 414(b) of the
Code) as KCS or any of its Subsidiaries, or is under common
control (within the meaning of Section 414(c) of the Code)
with KCS or any of its Subsidiaries.

"Guaranteed Obligations" shall have the meaning
ascribed to such term in Section 2.01 hereof.

"Guarantors" means KCS and Proliq.

"Guaranty Agreement", "hereof", "hereto", "hereunder"
and words of similar import mean this Guaranty Agreement, as a
whole, and not any particular article, section or subsection.

"KRI" means KCS Resources, Inc., a Delaware
corporation.

"Lenape" means The Lenape Resources Corporation,
formerly a New Jersey corporation, which merged with and into
KRI.

"Material Adverse Effect" means, with respect to any
Person, a material and adverse effect on its ability to
fulfill, punctually and completely, its obligations under this
Guaranty Agreement.

"Multiemployer Plan" means an Employee Plan defined
as such in Section 3(37) of ERISA to which contributions have
been made by KCS, any of its Subsidiaries, the Partnership or
any ERISA Affiliate and which is covered by Title IV of ERISA.

"PBGC" means the Pension Benefit Guaranty Corporation
or any entity succeeding to any or all of its functions under
ERISA.

"Wholly Owned Subsidiary" means, as to any Person,
any Subsidiary of such Person of which 100% of the issued and
outstanding capital stock is at the time owned, beneficially
and of record, by such Person, either directly or indirectly
through ownership of one or more Wholly Owned Subsidiaries.

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<PAGE> 7
Section 1.3 Use and Construction of Defined Terms: Credit
Agreement Definitions: References and Headings. (a) All terms defined in this
Guaranty Agreement shall have their defined meanings when used in each of the
other Loan Documents to which either KCS or Proliq is a party, unless any of
such instruments shall expressly indicate otherwise, and, when required by the
context, each term shall include the plural as well as the singular.
Definitions of each Person specifically defined herein or in each other Loan
Document to which either KCS or Proliq is a party shall mean and include herein
and therein, unless otherwise expressly provided to the contrary, the
successors, assigns, heirs and legal representatives of each such Person.
Unless the context otherwise requires or unless otherwise expressly provided,
references to this Guaranty Agreement and each other Loan Document shall
include all amendments, modifications, supplements, restatements,
ratifications, renewals, increases, extensions and rearrangements thereof or
thereto, as applicable and as in effect from time to time; provided, however,
nothing contained in this sentence shall be construed (i) to authorize any
Person to execute or enter into any such amendments, modifications,
supplements, restatements, ratifications, renewals, increases, extensions or
rearrangements, unless entered into and executed pursuant to the applicable
provisions of such respective Loan Documents, or (ii) to require the consent
of, or notice to, KCS and Proliq relating to any change, action, or inaction in
connection with any Loan Document to which either of them is not a party.
References herein to forms 10-K, 10-Q and 8-K shall mean such forms as
promulgated by, and completed in compliance with the requirements of, the SEC,
as in effect from time to time and at each applicable time.

(b) Unless otherwise defined in this Guaranty Agreement, all
capitalized terms that are defined in the Credit Agreement shall have the same
meanings herein as therein, and all defined terms shall have the same use and
construction herein as provided in the Credit Agreement, unless the context
herein otherwise indicates.

(c) Each reference herein to a Section, or any subdivision
thereof, shall refer to the applicable Section, or subdivision thereof, of this
Guaranty Agreement, unless another instrument is thereby expressly referenced.
Further, each reference herein to an Exhibit or Schedule shall refer to the
applicable Exhibit or Schedule attached hereto, unless another instrument is
thereby expressly referenced. The headings in this Guaranty Agreement and the
other Loan Documents are inserted for convenience only and shall be ignored
when construing any such instruments.

Section 1.4 Accounting Terms. Except as otherwise expressly
provided herein, accounting terms not specifically defined and which are used
herein and in the other Loan Documents to which either KCSor Proliq is a party
shall be construed, and all accounting procedures, calculations and reporting,
including, without limitation, the preparation of financial statements,
calculations and other financial information required to be furnished pursuant
to this Guaranty Agreement or any other Loan Document to which either KCS or
Proliq is a party, shall be performed, in accordance with GAAP consistently
applied.

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<PAGE> 8
ARTICLE II

THE GUARANTY

Section 2.1 Guaranteed Obligations. Each Guarantor hereby
irrevocably, absolutely and unconditionally guarantees, jointly and severally,
to Bank the punctual and complete payment, when due (whether by scheduled
payment, voluntary prepayment, mandatory prepayment, acceleration or
otherwise), of the following (herein, the "Guaranteed Obligations"):

All obligations, indebtedness, fees, expenses, costs, indemnities and
liabilities of the Borrower to Bank, now existing or hereafter arising, whether
direct, indirect, related, unrelated, fixed, contingent, liquidated,
unliquidated, joint, several, or joint and several, under, or in connection
with the Credit Agreement and the other Loan Documents to which the Borrower is
a party, including, without limitation, the Obligations, which include, without
limitation, the following:

(a) The Credit Note dated as of even date herewith in the
original stated principal amount of $25,000,000, executed by the
Borrower, and payable to the order of Bank;

(b) Any and all renewals and extensions for any period
and/or rearrangements and increases of the Credit Note;

(c) Any and all post-petition interest on the Obligations
in the event of a bankruptcy or insolvency of either Guarantor or of
the Borrower; and

(d) All attorneys' fees, commitment and other fees,
liabilities for costs and expenses, indemnities and other
indebtedness, obligations and liabilities of the Borrower to Bank at
any time created, existing or arising under or pursuant to the Credit
Agreement or any other Loan Document.

Section 2.2 Nature of Guaranty. This guaranty is an irrevocable,
absolute, unconditional, completed and continuing guaranty of payment, and not
a guaranty of collection or otherwise, and no notice of the Guaranteed
Obligations or any extension of credit already or hereafter made, contracted by
or extended to Borrower need be given to Guarantors. Borrower and Bank may
increase, rearrange, extend for any period and/or renew from time to time the
Guaranteed Obligations without notice to, or consent from, Guarantors, and in
each such event, Guarantors will remain fully bound hereunder on such
Guaranteed Obligations. This guaranty may not be revoked by Guarantors or
released or diminished on the occurrence of any act, event or circumstance and
shall continue to be effective or be reinstated, as the case may be, with
respect to the Guaranteed Obligations arising or created after any such
attempted revocation or other act, event or circumstance, or if at any time any
payment of any of the Guaranteed Obligations is rescinded or must otherwise be
returned by Bank upon the insolvency, bankruptcy or reorganization of any or
all of the Borrowers, Guarantors or otherwise, all as though such payment had
not been made. Each of the Guarantors hereby expressly waives (i) presentment,
demand, protest and notice of protest and dishonor on any and all

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<PAGE> 9
forms of the Guaranteed Obligations, (ii) notice, demand, notice of
presentment, presentment, presentment for payment, demand for payment,
non-payment, notice of dishonor, dishonor, NOTICE OF INTENT TO ACCELERATE,
NOTICE OF ACCELERATION, notice of intent to demand, protest, notice of protest,
notice of intent to terminate, notice of termination, grace, notice of any
Default, notice of any Event of Default or any other notice or formalities of
any kind with respect to the Obligations or the Guaranteed Obligations and
(iii) notice of acceptance of this Guaranty Agreement, acceptance on the part
of Bank being conclusively presumed by its request for this Guaranty Agreement
and delivery of the same to it, in all regards in respect to this Guaranty
Agreement and the performance of its obligations hereunder.

Section 2.3 Certain Rights of Bank. Each of the Guarantors
authorizes Bank, without notice, consent or demand and without affecting
Guarantors' liability hereunder, to take and hold security for the payment of
this Guaranty Agreement and/or any of the Guaranteed Obligations, and,
partially or fully, exchange, enforce, waive and release any such security; and
to apply such security and direct the order or manner of sale thereof as Bank,
in its discretion, may determine; and to obtain a guaranty of the Guaranteed
Obligations, or any portion thereof, from any one or more Persons and at any
time or times to enforce, waive, rearrange, compromise, modify, limit or
release, in whole or in part, any of such other Persons from their obligations
under such guaranties, or refrain from taking any such actions.

Section 2.4 Certain Waivers of Guarantor. Each of the Guarantors
waives any right to require Bank to (i) file suit or proceed to obtain or
assert a claim for personal judgment against any or all of the Borrower,
Guarantors or any other Persons, or make any effort at the collection of the
Guaranteed Obligations from any of them, (ii) foreclose or otherwise proceed
against, realize upon or exhaust any security held from any or all of the
Borrower, Guarantors or any other Persons, (iii) have, any or all of the
Borrower, Guarantor or any other Persons joined with Guarantors in any suit
arising out of this Guaranty Agreement and/or any of the Guaranteed
Obligations, or (iv) pursue any other remedy or Person in Bank's power
whatsoever. Each of the Guarantors waive any defense arising by reason of any
disability, lack of corporate or partnership authority or power, or other
defense of any or all of the Borrower, Guarantors or any other Persons of, or
with respect to, any of the Guaranteed Obligations, and shall remain liable
hereon regardless of whether any or all of the Borrower, Guarantors or any
other Persons be found not liable thereon for any reason. Each of the
Guarantors waives (w) any and all rights of subrogation, reimbursement,
contribution or otherwise, whether arising by contract, common law or operation
of law, (x) waives any right to enforce any remedy that Bank now has or may
hereafter have against any or all of the Borrower, Guarantors or any other
Persons, (y) waives any benefit of any right to participate in any security now
or hereafter held by Bank and (z), to the extent not expressly prohibited by
applicable law, each and every right to which it is or may be entitled by
virtue of the laws of the State of Texas, its jurisdiction of incorporation and
every other applicable jurisdiction which governs suretyship and guarantees
including, without limitation, any rights it may be entitled to pursuant to
Rule 31 of the Texas Rules of Civil Procedure, section 17.001 of the Texas
Civil Practice and Remedies Code and Chapter 34 of the Texas Business and
Commerce Code, as any or all of the same may be amended or construed from time
to time, or the common law of any applicable jurisdiction in effect at all
relevant times.

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<PAGE> 10
Each Guarantor agrees that each of the matters waived in this Section 2.4 is
made in all regards to this Guaranty Agreement, including, without limitation,
the performance of the obligations of each Guarantor hereunder, and none of the
matters referred to as waived shall ever be a condition or requirement to, or
excuse from, the performance of Guarantor's obligations hereunder, or the
enforcement by Bank of this Guaranty Agreement against either Guarantor.

Section 2.5 Maturity of Liabilities: Payment. Each Guarantor
agrees that if the maturity of any Guaranteed Obligations is accelerated by
bankruptcy, any other Event of Default or otherwise, such maturity shall also
be deemed accelerated for the purpose of this Guaranty Agreement, without
demand or notice of any kind (including, without limitation, those referred to
in Section 2.2 hereof) to Guarantors. Each Guarantor will, immediately upon
notice from Bank of the Borrower's failure to pay any Guaranteed Obligations
when due (howsoever due), pay to Bank the amount due and unpaid by the Borrower
and guaranteed hereby. The failure of Bank to give this notice shall not in
any way release Guarantors hereunder.

Section 2.6 Bank's Expenses. If Guarantors fail to pay the
Guaranteed Obligations after notice from Bank of the Borrower's failure to pay
any Guaranteed Obligations when due (howsoever due), and if Bank obtains the
services of an attorney for collection of amounts owing by Guarantors hereunder
(whether or not any suit or other proceeding is filed or commenced in
connection therewith), or if suit is filed to enforce this Guaranty Agreement,
or if proceedings are had in any bankruptcy, probate, receivership or other
judicial proceedings for the establishment or collection of any amount owing by
Guarantors hereunder, or if any amount owing by Guarantors hereunder is
collected through such proceedings, Guarantors agree to pay to Bank, Bank's
reasonable attorneys' fees, expenses and disbursements and, if applicable,
related court costs and expenses.

Section 2.7 Primary Liability. It is expressly agreed that the
liability of each Guarantor for the payment of the Guaranteed Obligations, as
stated herein, shall be primary and not secondary.

Section 2.8 Certain Events and Circumstances Not Reducing or
Discharging Guarantor's Obligations. Each Guarantor hereby consents and agrees
to each of the following, and agrees that its obligations under this Guaranty
Agreement shall not be released, diminished, impaired, reduced or adversely
affected, nor shall Bank's rights, remedies, privileges and benefits hereunder
be diminished, impaired, reduced, released, prejudiced or adversely affected in
any manner, by any of the following, and each Guarantor waives any rights
(including without limitation rights to notice and/or consent) which it might
otherwise have as a result of or in connection with any of the following:

(a) any creation, advancement, extension renewal,
restatement, supplement, modification, amendment, alteration, increase
or rearrangement of all or any part of the Guaranteed Obligations, or
the Credit Note, or the Credit Agreement or any other Loan Document,
or any contract or understanding between the Borrower and Bank, or any
other parties, pertaining to the Guaranteed Obligations;

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<PAGE> 11
(b) any adjustment, indulgence, forbearance or compromise
that might be granted or given by Bank to any or all of the Borrower,
any Guarantor or any other Persons;

(c) the insolvency, bankruptcy, rearrangement,
adjustment, composition, liquidation, disability, dissolution or lack
of power or authority of any or all of the Borrower, any Guarantor or
any other Persons; or any dissolution of any or all of the Borrower,
any Guarantor or any other Persons, or any sale, lease or transfer of
any or all of the Properties of any or all of the Borrower, any
Guarantor or any other Persons, or any changes in the shareholders,
partners or members of any or all of the Borrower, any Guarantor or
any other Persons; or any reorganization, merger, consolidation,
restructure or reformulation into a different type of Person (for
example, to a partnership from a corporation) of any or all of the
Borrower, any Guarantor or any other Persons;

(d) the invalidity, illegality or unenforceability of all
or any part of the Guaranteed Obligations, or any document, instrument
or agreement executed in connection with the Guaranteed Obligations,
for any reason whatsoever, including, without limitation, the fact
that the Guaranteed Obligations, or any part thereof, exceed the
amount permitted by law, the act of creating the Guaranteed
Obligations or any part thereof is ultra vires, the officers or
representatives executing the documents, instruments, agreements or
otherwise creating the Guaranteed Obligations acted in excess of their
authority, the Guaranteed Obligations violate applicable usury laws,
the Borrower has valid defenses, claims or offsets (whether at law, in
equity or by agreement) which render the Guaranteed Obligations wholly
or partially uncollectible from the Borrower, the creation,
performance or repayment of the Guaranteed Obligations (or the
execution, delivery and performance of any document, instrument or
agreement representing part of the Guaranteed Obligations or executed
in connection with the Guaranteed Obligations, or given to secure the
repayment of the Guaranteed Obligations) is illegal, uncollectible,
legally impossible or unenforceable, or the Credit Agreement or other
documents, instruments or agreements pertaining to the Guaranteed
Obligations have been forged or otherwise are irregular or not genuine
or authentic;

(e) any full or partial release of the liability,
indebtedness, obligations, covenants or agreements of any or all of
the Borrower, any Guarantor or any other Persons on the Guaranteed
Obligations or any part thereof, whether directly or indirectly,
jointly, severally, or jointly and severally, to pay, perform,
guarantee or assure the payment of the Guaranteed Obligations or any
part thereof, it being recognized, acknowledged and agreed by
Guarantor that it is expected to pay the Guaranteed Obligations in
full without assistance or support of any other Guarantor, party or
Person, and Guarantor hereby acknowledges and agrees that it has not
been induced to enter into this Guaranty Agreement on the basis of a
contemplation, belief, understanding or agreement that other parties
or Persons (or their Properties) will be liable to perform the
Guaranteed Obligations, or Bank will look, in whole or part, to other
parties or Persons (or their Properties) to perform the Guaranteed
Obligations;

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<PAGE> 12
(f) the taking or accepting of any other security,
Collateral or guaranty, or other assurance of payment, for all or any
part of the Guaranteed Obligations;

(g) any substitution, release, surrender, exchange,
subordination, deterioration, failure to perfect, waste, loss or
impairment of any Collateral, Property or security, at any time
existing in connection with, or assuring or securing payment of, all
or any part of the Guaranteed Obligations;

(h) the failure of Bank or any other party or Person to
exercise diligence or reasonable care in the preservation, protection,
enforcement, sale or other handling or treatment of all or any part of
such Collateral, Property or security, or any delay in the enforcement
of the payment of the Guaranteed Obligations (or any part thereof), or
any delay or omission or lack of diligence or care in exercising any
right or power with respect to the Guaranteed Obligations or any
security therefor or guaranty thereof;

(i) the fact that any Collateral, security, security
interest or Lien contemplated or intended to be given, created or
granted as security for the repayment of the Guaranteed Obligations
shall not be properly perfected or created, or shall prove to be
unenforceable or subordinate to any other security interest or Lien,
it being recognized and agreed by Guarantor that it is not entering
into this Guaranty Agreement in reliance on, or in contemplation of
the benefits of, the validity, enforceability, collectability or value
of any of the Collateral for the Guaranteed Obligations, or the
existence, perfection or priority of any Liens or security interests
therein;

(j) any payment by the Borrower to Bank is held to
constitute a preference under bankruptcy or similar laws, or for any
reason Bank is required to refund such payment or pay such amount to
the Borrower or someone else; or

(k) any other action taken or omitted to be taken with
respect to the Credit Agreement and any other Loan Document, the
Guaranteed Obligations, or the security and Collateral therefor,
whether or not such action or omission prejudices Guarantor or
increases the likelihood that Guarantor will be required to pay the
Guaranteed Obligations pursuant to the terms hereof; it is the
unambiguous and unequivocal intention of Guarantor that it shall be
obligated to pay the Guaranteed Obligations when due (howsoever due),
notwithstanding any occurrence, circumstance, event, action or
omission whatsoever, whether contemplated or uncontemplated, and
whether or not otherwise or particularly described herein, except for
the full and final payment and satisfaction of the Guaranteed
Obligations.

Section 2.9 No Mitigation. Bank shall not be required to
mitigate damages or take any other action to reduce, collect or enforce the
Guaranteed Obligations against any Guarantor. No set-off, counterclaim,
reduction, or diminution of any obligation, or any defense, of any kind or
nature which any Guarantor has or may have against the Borrower, Bank or any
other Person shall be available hereunder to any Guarantor. Each Guarantor
agrees that it shall have no recourse or action

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<PAGE> 13
against Bank by reason of any action Bank may take or omit to take in
connection with the Guaranteed Obligations, the collection of any sums or
amounts herein mentioned, or in connection with any security or Collateral or
guaranty at any time existing therefor.

Section 2.10 Indebtedness or Other Obligations. If a Guarantor is
or becomes liable for any indebtedness owed by the Borrower to Bank by
endorsement or otherwise than under the Guaranty Agreement, such liability
shall not be in any manner impaired, reduced or affected by this Guaranty
Agreement, and the rights of Bank hereunder shall be cumulative of any and all
other rights that Bank may ever have against such Guarantor. If the Borrower
shall at any time or times be or become obligated to Bank for payment of any
indebtedness other than the Guaranteed Obligations, Bank (without in anywise
impairing its rights hereunder or diminishing Guarantor's liability) shall be
at liberty at any time or times to apply to said indebtedness other than the
Guaranteed Obligations any amounts paid to or received by or coming into the
hands of Bank from or attributable to the Borrower or any other Persons or
party liable for any of said indebtedness or from or attributable to or
representing proceeds of any Property or security held by Bank securing payment
of any of said indebtedness or any credits, deposits or offsets due the
Borrower or other Person liable on any of said indebtedness (whether or not the
Guaranteed Obligations or such other indebtedness are then due), it being
intended to give Bank the right to apply all payments, credits and offsets and
amounts becoming available for application on or credit against the
indebtedness of the Borrower to Bank (now or hereafter existing) first toward
payment and satisfaction of the Borrower's indebtedness not hereby guaranteed,
before making application thereof on or against the Guaranteed Obligations.
The exercise by Bank of any right or remedy hereunder or under any other
instrument or at law or in equity shall not preclude the concurrent or
subsequent exercise of any other instrument or remedy at law or in equity and
shall not preclude the concurrent or subsequent exercise of any other right or
remedy.

ARTICLE III

REPRESENTATIONS AND WARRANTIES

In order to induce Bank to accept this Guaranty Agreement and to enter
into and perform the Credit Agreement, each Guarantor represents and warrants
to Bank that (all of the hereinafter made representations and warranties will
survive the creation of the Guaranteed Obligations and any extension of credit
thereunder):

Section 3.1 Corporate Existence and Authority. Each Guarantor
(i) is a corporation duly organized, validly existing, and in good standing
under the laws of the jurisdiction of its incorporation; (ii) has all legal
right and requisite corporate power and authority (A) to own and operate its
assets and Properties and carry on its business as now being or as proposed to
be conducted, (B) to enter into, execute, deliver and perform its obligations
pursuant to this Guaranty Agreement and the other Loan Documents to which it is
a party and (C) to grant the Liens, guaranty and indemnity as provided in this
Guaranty Agreement and the other Loan Documents to which it is a party; and
(iii) is qualified to do business in all jurisdictions in which the nature of
its business makes such qualification necessary and where failure to so qualify
would have a Material Adverse Effect on

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<PAGE> 14
it or a material and adverse effect on the condition as a whole, financial or
otherwise, of KCS and its Subsidiaries.

Section 3.2 Authorization. The execution, delivery, and
performance by KCS of this Guaranty Agreement and the other Loan Documents to
which it is or may become a party have been duly authorized by all requisite
action on its part.

Section 3.3 Enforceability. Each of this Guaranty Agreement and
the other Loan Documents to which KCS and Proliq is a party has been duly
executed and delivered and constitutes the legal, valid, and binding
obligations of KCS and Proliq, enforceable against KCS and Proliq in accordance
with their respective terms, except as limited by bankruptcy, insolvency or
similar laws affecting generally the rights of creditors and general principles
of equity whether applied by a court of law or equity.

Section 3.4 No Breach. Neither the execution and delivery of
this Guaranty Agreement or the other Loan Documents to which KCS and Proliq are
a party, nor the compliance with, or performance of, the terms and provisions
hereof or thereof, does or will (i) conflict with, or result in or constitute a
breach, default or violation of, or require any consent under, (A) the charter
or by-laws of KCS or Proliq, or (B) any applicable law, rule, or regulation, or
any order, writ, injunction or decree of any court, governmental authority or
arbitrator or agency, or (C) any material agreement or instrument to which KCS
or Proliq is a party or by which KCS, Proliq or their Properties is bound or to
which KCS, Proliq or its Properties is subject, or (ii) result in the creation
or imposition of any Lien (except Liens in favor of Bank) upon any of the
revenues or Property of KCS and Proliq pursuant to the terms of any agreement
or instrument.

Section 3.5 Approvals. No authorization, approval, or consent
of, and no filing or registration with, any court, governmental authority, or
third party is required or will be necessary for the execution, delivery, or
performance by KCS and Proliq of this Guaranty Agreement and the other Loan
Documents to which they are or may become a party or for the validity or
enforceability thereof, or if required or necessary, has been duly obtained.

Section 3.6 Litigation and Judgments. There is no action, suit,
investigation or proceeding before any court, administrative board,
governmental authority, or arbitrator pending, or to the knowledge of either of
KCS, threatened against or affecting (i) any of its abilities to enter into,
execute, deliver, or perform, punctually and completely, its obligations under
this Guaranty Agreement or the other Loan Documents to which it is a party, or
(ii) except as disclosed in the form 10-K of KCS and its Subsidiaries for the
fiscal year ended September 30, 1994, (a) KCS which, if adversely determined,
could reasonably be expected to result in any judgment or liability exceeding
valid and uncontested insurance coverage therefor by an amount of $500,000, or
(b) the condition as a whole, financial or otherwise, of KCS and its
Subsidiaries. Except as disclosed in the form 10-K of KCS and its Subsidiaries
for the fiscal year ended September 30, 1994, there are no outstanding
judgments or similar claims against KCS which exceed valid and uncontested
insurance coverage therefor by an amount of $500,000.

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<PAGE> 15
Section 3.7 Investment Company Act. Neither KCS nor any of its
Subsidiaries is an "investment company" or a company "controlled" by an
"investment company", within the meaning of the Investment Company Act of 1940,
as amended.

Section 3.8 Public Utility Holding Company Act. Neither KCS nor
any of its Subsidiaries is a "holding company" or a "subsidiary company" of a
"holding company" or an "affiliate" of a "holding company" or a "subsidiary
company" of a "holding company", or a "public utility" within the meaning of
the Public Utility Holding Company Act of 1935, as amended.

Section 3.9 Financial Statements. KCS has delivered to Bank
audited consolidated financial statements and unaudited consolidating financial
statements of KCS and its Subsidiaries as at and for the fiscal year ended
September 30, 1994. Such financial statements have been prepared in accordance
with GAAP, and fairly present, on a consolidated basis, the financial condition
of KCS and its Subsidiaries as of the respective dates indicated therein and
the results of operations for the respective periods indicated therein.
Neither KCS nor any of its Subsidiaries has any material contingent
liabilities, liabilities for taxes, material forward or long-term commitments,
or unrealized or anticipated losses from any unfavorable commitments not
reflected in such financial statements. There has been no change in the
condition, financial or otherwise, or operations of KCS or its Subsidiaries, on
a consolidated basis, since the effective date of the most recent financial
statements referred to in this Section which would have a material and adverse
effect on the condition as a whole, financial or otherwise, of KCS and its
Subsidiaries, or a Material Adverse Effect on KCS.

Section 3.10 Use of Proceeds: Margin Securities. Neither KCS nor
any of its Subsidiaries is engaged principally, or as one of its important
activities, in the business of extending credit for the purpose of purchasing
or carrying margin stock (within the meaning of Regulations G, T, U, or X of
the Board of Governors of the Federal Reserve System), and no part of the
proceeds of any extension of credit under the Credit Agreement will be used to
purchase or carry any such margin stock or to extend credit to others for the
purpose of purchasing or carrying margin stock. Neither KCS nor any of its
Subsidiaries, nor any Person acting on any of their behalf has taken any action
that might cause the transactions contemplated by the Credit Agreement to
violate Regulations G, T, U, or X or to violate the Securities Exchange Act of
1934, as amended.

Section 3.11 ERISA. Each of KCS, its Subsidiaries and the ERISA
Affiliates has fulfilled its obligations under the minimum funding requirements
and all other applicable and material requirements of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA") and the Code with respect to
each Employee Plan, is in compliance with the presently applicable provisions
of ERISA and the Code, and has not incurred any liability to the PBGC or any
Employee Plan or Multiemployer Plan. No Reportable Event (as defined in
Section 4043 of ERISA) has occurred in connection with any Employee Plan that
might constitute grounds for the termination thereof by the PBGC or for the
appointment by the appropriate United States District Court of a trustee to
administer such plan.

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<PAGE> 16
Section 3.12 Environmental Matters.

(a) Except as disclosed in Schedule 14 to the Credit
Agreement, and as to which Bank has waived, each of KCS and its
Subsidiaries, and all of their respective Properties, assets, and
operations are in full compliance with all applicable Environmental
Laws. Except as described in Schedule 14 to the Credit Agreement, and
as to which Bank has waived, neither KCS nor any of its Subsidiaries
is aware of, nor has any of them received notice of, any past,
present, or future conditions, events, activities, practices, or
incidents which would interfere with or prevent the compliance or
continued compliance of each of them with any applicable Environmental
Laws.

(b) Except as disclosed in Schedule 14 to the Credit
Agreement, and as to which Bank has waived, each of KCS and its
Subsidiaries has obtained all permits, licenses, and authorizations
that are required under applicable Environmental Laws, and which the
failure to obtain would have (i) an adverse effect (other than of an
inconsequential nature) on the operations or value of, or any of their
interest in, any of their respective Properties, or (ii) a Material
Adverse Effect with respect to any of them.

(c) Except as disclosed in Schedule 14 to the Credit
Agreement, and as to which Bank has waived, no hazardous substances
exist on, about, or within or have been used, generated, stored,
transported, disposed of on, or released from any of the Properties or
assets of any of KCS or its Subsidiaries except in accordance with
applicable Environmental Laws. Each of KCS and its Subsidiaries
intends to make use of its respective Properties and assets in a
manner that will not result in the violation of any applicable
Environmental Law with respect to the use, generation, storage,
transportation, accumulation, disposal, or release of any hazardous
substance on, in, or from any such Properties or assets.

(d) Except as disclosed in Schedule 14 to the Credit
Agreement, and as to which Bank has waived, there is no action, suit,
proceeding, investigation, or inquiry before any court, administrative
agency, or other Governmental Authority pending or, to the knowledge
of KCS, threatened against it or its Subsidiaries, or its Properties,
arising under CERCLA or any other applicable Environmental Law.
Except as disclosed in Schedule 14 to the Credit Agreement, and as to
which Bank has waived, neither KCS nor any of its Subsidiaries has (i)
any liability for remedial action under CERCLA or any other similar
Environmental Law which, to its knowledge after having made reasonable
inquiry, has been imposed or assessed by any Governmental Authority or
other Person, (ii) received any pending request for information by any
Governmental Authority with respect to potential liability for
remedial action under CERCLA or any other applicable Environmental Law
and the condition, use, or operation of any of its Properties or
assets, or (iii) received any pending notice from any Governmental
Authority or other Person with respect to any violation of, or
liability for remedial action under, any Environmental Law.

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<PAGE> 17
Section 3.13 Disclosure. No information, statement, exhibit,
certificate, document, report, representation, or warranty made or furnished to
Bank by or on behalf of KCS or Proliq in connection with, or pursuant to the
provisions of, this Guaranty Agreement, the Credit Agreement or any other Loan
Document contained or contains any untrue statement or misstatement of fact or
omitted or omits to state any fact necessary to make the statements herein or
therein not misleading.

Section 3.14 Fair Consideration. KCS and Proliq each acknowledge
and agree that the execution of this Guaranty Agreement and the other Loan
Documents to which it is a party was undertaken by it after due consideration
of the direct and indirect benefits obtained and to be obtained by it as a
result of the execution of this Guaranty Agreement and the other Loan Documents
to which it is a party and further acknowledge, represent and confirm that (i)
it has received, directly or indirectly, contemporaneously herewith good and
fair consideration and reasonably equivalent value in exchange for the
execution of this Guaranty Agreement and all other Loan Documents to which it
is a party, including, without limitation, the incurrence of obligations
incurred and undertaken hereunder and thereunder and the granting of Liens
pursuant hereto and thereto, (ii) neither Bank nor any officer, director,
employee or agent thereof has made any representations, warranties, statements,
promises or agreements except as expressly set forth in the Loan Documents and
solely for the specific purposes as set forth therein, (iii) it is solvent as
of the date of the incurrence of its obligations hereunder and under the other
Loan Documents to which it is a party, and it will not become insolvent as a
result of the obligations incurred by it hereunder or under the other Loan
Documents to which it is a party, and (iv) it is familiar with, and has
independently reviewed the books and records regarding the financial condition
and Properties of the Borrower, however, it is not relying on such financial
condition or Properties of the Borrower as an inducement to enter into and
perform this Guaranty Agreement.

ARTICLE IV

Positive Covenants

Guarantors covenant and agree that, as long as the Guaranteed
Obligations or any part thereof are outstanding and unpaid or Bank has any
commitment under the Credit Agreement, KCS and Proliq, as the case may be, will
perform and observe the following positive covenants:

Section 4.1 Financial Statements. KCS will furnish and cause to
be furnished to Bank:

(a) As soon as available, and in any event within 90 days
after the end of each fiscal year of KCS, beginning with the fiscal
year ending September 30, 1994, a copy of the annual audited report of
KCS and its Subsidiaries (including, without limitation, the Borrower)
for such fiscal year containing, on a consolidated basis, balance
sheets, statements of income, statements of stockholders' equity, and
statements of consolidated cash flow as at the end of such fiscal year
and for the 12-month period then ended, in each case setting forth in
comparative form the figures for the preceding fiscal year, all in
reasonable detail and audited and certified by Arthur Andersen & Co.,
or other independent certified public accountants of recognized
standing acceptable to Bank, to the effect that such report has been

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<PAGE> 18
prepared in accordance with GAAP and presents fairly the financial
position and condition of such Persons as of, and for, the periods
therein covered.

(b) As soon as available, and in any event within 90 days
after the end of each fiscal year of KCS, beginning with the fiscal
year ended September 30, 1994, (i) a copy of an unaudited
consolidating balance sheet and income statement of KCS and its
Subsidiaries (including, without limitation, the Borrower) for such
fiscal year, in support of the financial information delivered to Bank
pursuant to Section 4. 1 (a) above, certified by the chief financial
officer of KCS that such statements were prepared in accordance with,
and based upon, the books and records of KCS and its Subsidiaries,
respectively, and (ii) a calculation of (A) Consolidated Aggregate
Cash Flow and (B) Adjusted Consolidated Principal Debt, for the four
fiscal quarters then ended, all in reasonable detail to determine
compliance with this Guaranty Agreement, and certified by the chief
financial officer of KCS that such calculations were prepared in
accordance with the terms of this Guaranty Agreement and based upon
the books and records of KCS and its Subsidiaries, respectively.

(c) As soon as available, and in any event within 45 days
after the end of each of the first three quarters of each fiscal year
of KCS, a copy of an unaudited financial report of KCS and its
Subsidiaries (including, without limitation, the Borrower) as of the
end of such fiscal quarter and for the portion of the fiscal year then
ended, containing, on a consolidated basis, balance sheets, statements
of income and statements of consolidated cash flow, in each case
setting forth in comparative form the figures for the corresponding
period of the preceding fiscal year, all in reasonable detail, as
included in Form 10-Q filed with the SEC, which is signed by the chief
financial officer of KCS.

(d) As soon as available, and in any event 90 days after
the end of each (i) September 30, KCS will furnish to Bank a projected
budget for the operations of KCS and its Subsidiaries, on a
consolidated basis, for the five fiscal years commencing with such
corresponding September 30, prepared in a year-by-year analysis.

Section 4.2 Certificates, Other Information. KCS will furnish
and cause to be furnished to Bank all of the following:

(a) Concurrently with the delivery of each of the
financial statements referred to in Sections 4.1 commencing with the
quarter ending December 31, 1994, a certificate of the president, any
vice president or chief financial officer of KCS (i) stating that to
the best of such officer's knowledge and after making due inquiry, no
Event of Default, Default or Restriction Event (in each event, that
pertains to, or involves, KCS) has occurred and is continuing, or if
in its opinion an Event of Default, Default or Restriction Event has
occurred and is continuing, a statement as to the nature thereof and
the steps and action being taken to remedy such event, and (ii)
confirming the calculations set forth in the officers' certificate and
showing in reasonable detail satisfactory to Bank the calculations
showing (A) the

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<PAGE> 19
determination of the amounts referred to in Section 4.01(b)(ii), and
(B) compliance with Sections 6.1, 6.2, 6.3 and 6.4 and, to the extent
applicable, Required Performance.

(b) As soon as available, one copy of each form 10-K,
form 10-Q and form 8-K of KCS and its Subsidiaries, and press releases
of KCS and of each of its Subsidiaries.

Section 4.3 Performance of Obligations. Neither KCS nor Proliq
will take any action, or refrain from taking any action, that could preclude or
prejudice, or precludes or prejudices, the ability, authority or power of the
Borrower from punctually and completely paying and performing any of its
obligations, agreements and covenants under the Loan Documents to which it is a
party.

Section 4.4 Preservation of Existence and Conduct of Business.
KCS and Proliq will preserve and maintain their corporate existence, and all of
their leases, privileges, franchises, qualifications, and rights that are
necessary or desirable in the ordinary conduct of their businesses and conduct
their businesses as presently conducted in an orderly and efficient manner in
accordance with good business practices. KCS and Proliq will not change their
names or identities or corporate structure, or change the location of their
places of business or, if more than one place of business, their chief
executive office, or the place where they keeps their books and records, as
designated under the designation Principal Place of Business in the signature
page hereof, without notifying Bank of such change in writing at least 30 days
prior to the effective date of such change. KCS and Proliq will not accept or
require the transfer of, any cash receipts or other funds from the Borrower
during the existence and continuance of a Restriction Event, or in the event
that it receives any such receipts or funds during a Restriction Event, retain
any such receipts or funds; it being agreed that if KCS or Proliq receives any
such receipts or funds during a Restriction Event, it will immediately disburse
same to the Disbursement Account of the Borrower.

Section 4.5 Inspection Rights. At any reasonable time and from
time to time, KCS will permit, in each event upon reasonable notice to a Person
Bank reasonably believes to be an officer of KCS or Proliq, as the case may be,
representatives of Bank to examine, copy and make extracts of their books and
records, to visit and inspect their Properties, and to discuss their business,
operations and financial condition and affairs with its officers, and, with the
consent of a Person Bank reasonably believes to be an officer of KCS or Proliq
(which consent will not be unreasonably withheld or delayed), with other
employees of KCS and Proliq and other Persons related to the operations or
business of KCS and Proliq, all to the extent reasonably requested by Bank.

Section 4.6 Keeping Books and Records. KCS and Proliq will each
maintain proper books of record and accounts in conformity with GAAP.

Section 4.7 Notices. KCS and Proliq will promptly notify Bank of
the occurrence of an Event of Default, Default or Restriction Event that
pertains to, or involves, KCS.

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Section 4.8 Further Assurances. KCS and Proliq each agree, at
its expense, to promptly cure any defects in the execution, creation, delivery,
and issuance of this Guaranty Agreement or any other Loan Documents to which it
is a party. KCS and Proliq each agree, at its expense, to promptly execute and
deliver to Bank upon request all such other and further documents, agreements,
and instruments in compliance with or accomplishment of the covenants and
agreements of each of them in this Guaranty Agreement or any other Loan
Documents to which it is a party, or further to evidence and more fully
describe the Property intended as security for the Guaranteed Obligations, or
to correct any omissions in this Guaranty Agreement or any other Loan Documents
to which it is a party, or more fully state the security obligations set out
herein or in any of the Loan Documents to which it is a party, or to perfect,
protect, or preserve any Liens and other rights created pursuant to any of the
Loan Documents to which it is a party, or to make any recordings, to file any
notices, or obtain any consents, waivers, or subordinations, all as may be
necessary or appropriate in connection therewith.

Section 4.9 Compliance with ERISA. KCS will comply, and will
cause each of its Subsidiaries to comply, with all minimum funding
requirements, and all other material requirements of ERISA and the Code, if
applicable, so as not to give rise to any liability thereunder. Promptly after
the filing thereof, KCS shall furnish or cause to be furnished to Bank with
regard to each employee benefit plan of KCS and its Subsidiaries, copies of
each annual report required to be filed pursuant to Section 103 of ERISA in
connection with each such plan for each plan year. KCS will notify, and cause
to be notified, Bank promptly of the following:

(i) any reportable event, as defined in Section 4043(b)
of ERISA and the regulations issued thereunder, with respect to an
Employee Plan, as to which PBGC has not by regulation waived the
requirement of Section 4043(a) of ERISA that it be notified within 30
days of the occurrence of such event (provided that a failure to meet
the minimum funding standard of Section 412 of the Code or Section 302
of ERISA shall be a reportable event regardless of the issuance of any
waivers in accordance with Section 412(d) of the Code);

(ii) the filing under Section 4041 of ERISA of a notice of
intent to terminate any Employee Plan or the termination of any
Employee Plan;

(iii) the institution by PBGC of proceedings under Section
4042 of ERISA for the termination of, or the appointment of a trustee
to administer, any Plan, or the receipt by KCS or any ERISA Affiliate
of a notice from a Multiemployer Plan that such action has been taken
by PBGC with respect to such Multiemployer Plan;

(iv) the complete or partial withdrawal by KCS or any
ERISA Affiliate under Section 4201 or 4204 of ERISA from a
Multiemployer Plan, or the receipt by KCS or any ERISA Affiliate of
notice from a Multiemployer Plan that is in reorganization or
insolvency pursuant to Section 4241 or 4245 of ERISA or that it
intends to terminate or has terminated under Section 4041A of ERISA;
and

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(v) the institution of a proceeding by a fiduciary of any
Multiemployer Plan against KCS or any ERISA Affiliate to enforce
Section 515 of ERISA, which proceeding is not dismissed within 30
days.

ARTICLE V

Negative Covenants

KCS covenants and agrees that, as long as the Guaranteed Obligations
or any part thereof are outstanding and unpaid or Bank has any commitment under
the Credit Agreement, KCS will perform and observe the following negative
covenants:

Section 5.1 Mergers and Dissolutions, Change in Business
Structure. (a) KCS will not become a party to a merger or consolidation, or
dissolve or liquidate; provided however, any Subsidiary of KCS may be merged or
consolidated with or into KCS if KCS shall be the continuing and surviving
corporation, and after giving effect thereto, no Default would exist; provided
further however, if such Subsidiary is the Borrower, KCS shall further execute
and deliver such documents, instruments and/or agreements, and shall take such
actions, as Bank shall reasonably request to evidence the express assumption of
liabilities, obligations, agreements, representations, warranties, covenants
and Liens as to which the Borrower had agreed pursuant to the Loan Documents to
which the Borrower was or is a party.

(b) KCS will not amend or otherwise modify its corporate
charter or its corporate activities or nature, as applicable, in any
manner that reasonably could result in a material and adverse effect
on the condition as a whole, financial or otherwise, of KCS or a
Material Adverse Effect on KCS.

Section 5.2 Restricted Payments. KCS will not, nor will it
permit any of its Subsidiaries to, declare or pay any dividends or make any
other payment on account of its capital stock, or return any capital to its
stockholders, or make any distributions of its assets to its stockholders;
provided however, (i) KCS may declare and pay dividends on account of its
capital stock in an amount not exceeding an amount equal to 50% of Consolidated
Net Income for the period from September 30, 1993, to such time so long as (A)
payments thereof are made within the time permitted under Delaware law as in
effect from time to time, (B) no Default, Event of Default or Restriction Event
exists at the time of such payment, and (C) such payment does not create or
result in a Default, Event of Default or Restriction Event, (ii) each
Subsidiary of the Borrower may declare and pay dividends to the Borrower on
account of capital stock of such Subsidiary, and (iii) each Subsidiary of KCS
may declare and pay dividends to KCS, directly or indirectly, as applicable,
for the purpose of KCS satisfying its obligations under this Guaranty
Agreement, provided that such dividends are so used by KCS.

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Section 5.3 Environmental Matters. Except for customary
obligations that arise and/or are diligently managed in the normal course of
business of each of KCS and its Subsidiaries pursuant to operating regulatory
requirements, KCS will not, nor will it permit any of its Subsidiaries to,
cause or knowingly permit any of their respective Properties to be in violation
of, or do anything or permit anything to be done which could subject any such
Property to any remedial obligations under, any Environmental Laws, assuming
disclosure to the applicable Governmental Authority of all relevant facts,
conditions and circumstances, if any, pertaining to such Property. KCS will
promptly notify Bank in writing of any existing, pending or threatened action
or investigation by any Governmental Authority in connection with any
Environmental Laws. KCS will establish and implement practices and procedures
that are intended reasonably to determine and assure, consistent with a prudent
operator standard and generally accepted standards and practices in the oil and
gas industry, that (i) no solid wastes are disposed of on any Property owned by
any of them or their Subsidiaries in quantities or locations that would require
remedial action under any Environmental Laws, except in compliance with
applicable Environmental Laws, (ii) except as released in compliance with
applicable Environmental Laws, no hazardous substance will be released on or to
any such Property in a quantity equal to or exceeding that quantity which
requires reporting pursuant to Section 103 of CERCLA or any other applicable
Environmental Laws, (iii) no hazardous substance is released on or to any such
Property so as to pose an imminent and substantial endangerment to public
health or welfare or the environment, (iv) all hazardous wastes and, to the
extent required by the Texas Railroad Commission (or equivalent and/or
successor agency or agencies of the State of Texas) and/or other applicable
Governmental Authority, solid wastes and oil and gas wastes generated by KCS,
or any of its Subsidiaries, or on any Property of any of them, to the extent
necessary for disposal off site, will be transported only by carriers
maintaining valid permits under RCRA and other applicable Environmental Laws
and treated, stored, and disposed of only by facilities operating incompliance
with RCRA and other applicable Environmental Laws, and (v) KCS and its
Subsidiaries, and their respective Properties and operations, will be
maintained and operated in compliance with all permits, licenses, and similar
authorizations required pursuant to any applicable Environmental Laws. Upon
the violation of applicable Environmental Laws by KCS or its Subsidiaries, KCS
will take and cause to be taken whatever action is required by law promptly
upon discovery to remedy the same.

Section 5.4 ERISA Compliance. KCS will not, nor will it permit
any of its Subsidiaries to, permit any Employee Plan maintained by any of them
to:

(a) engage in any "prohibited transaction" as such term
is defined in Section 4975 of the Code;

(b) incur any "accumulated funding deficiency" as such
term is defined in Section 302 of ERISA; and

(c) terminate any such Employee Plan in a manner which
could result in the imposition of a Lien on any of their Property
pursuant to Section 4068 of ERISA.

-22-
<PAGE> 23
ARTICLE VI

Financial Covenants

KCS covenants and agrees that, as long as the Guaranteed Obligations
or any part thereof are outstanding or Bank has any commitment under the Credit
Agreement, KCS will perform and observe, and cause to be performed and
observed, the following financial covenants:

Section 6.1 Minimum Current Ratio. KCS will, as at the end of
each of its fiscal quarterly periods, maintain a Consolidated Current Ratio of
not less than 1.0 to 1.0.

Section 6.2 Minimum Consolidated Tangible Net Worth. KCS will,
as at the end of each of its fiscal quarterly periods, maintain Consolidated
Tangible Net Worth in an amount not less than $33,000,000 plus an amount equal
to 50% of positive Consolidated Net Income for each quarter beginning with the
quarter commencing on July 1, 1993, and each quarter thereafter on a cumulative
basis, through and including the Credit Maturity Date. For purposes of this
Section 6.2, the phrase "positive Consolidated Net Income" shall mean
Consolidated Net Income which, when computed, results in a positive amount, and
excludes, and does not include the effect of any such amount which, when
computed, results in a negative amount.

Section 6.3 Minimum Debt Coverage. KCS will, at the last day of
each calendar quarter and at all times thereafter until the last day of the
next succeeding calendar quarter, maintain a ratio of Consolidated Cash Flow to
Adjusted Consolidated Principal Debt (excluding the Bay Springs Subordinated
Debt) of not less than 1. 25 to 1. 00, as such Consolidated Cash Flow and
Adjusted Consolidated Principal Debt, and component elements thereof, are
computed and determined as of each such quarterly dates.

Section 6.4 Minimum Debt to Capitalization Ratio. KCS will, as
at the end of each of its fiscal quarterly periods, maintain a Debt to
Capitalization Ratio of not more than 0.60 to 1.00.

ARTICLE VII

Miscellaneous

Section 7.1 Reliance on Documents. Any verbal communication or
instrument in writing, telex, telegram, telecopy, facsimile, cable or other
transmission received by Bank in connection with any matter with respect to
this Guaranty Agreement or any other Loan Documents to which KCS or Proliq is a
party which purports to be dispatched or signed by or on behalf of KCS or
Proliq shall conclusively be deemed to have been dispatched or signed by or on
behalf of KCS or Proliq, as the case may be, pursuant to such Person's
authority to bind KCS or Proliq and all other Persons for the liabilities and
matters in connection therewith to Bank, and Bank may conclusively rely thereon
and shall have no obligation, duty or responsibility to determine the validity
or genuineness thereof or the authority of the Person or Persons executing or
dispatching the same.

-23-
<PAGE> 24
Section 7.2 No Waiver: Cumulative Remedies. No failure on the
part of the Bank to exercise and no delay in exercising, and no course of
dealing with respect to, any right, power, or privilege under this Guaranty
Agreement or any other Loan Document shall operate as a waiver thereof, nor
shall any single or partial exercise of any right, power or privilege, or any
abandonment or discontinuance of steps or actions to enforce such a right,
power or privilege, under any Loan Document preclude any other or further
exercise thereof or the exercise of any other right, power, or privilege. The
rights and remedies provided for in this Guaranty Agreement and the other Loan
Documents are cumulative and not exclusive of any rights and remedies provided
by law or at equity.

Section 7.3 Survival of Representations and Warranties. All
representations and warranties made by, or on behalf of, KCS and Proliq in this
Guaranty Agreement or any other Loan Document to which either is a party or in
any document, statement, or certificate furnished in connection with any such
documents shall survive the execution and delivery of this Guaranty Agreement
and such other Loan Documents, and no investigation at any time made by or on
behalf of Bank shall diminish or otherwise affect such representations and
warranties or the right of Bank to rely upon them. All statements made by or
on behalf of KCS or Proliq in connection with any Loan Document or the
transactions contemplated thereby shall constitute representations and
warranties of each of them.

Section 7.4 Notices. All notices and other communications
provided for herein (including, without limitation any modifications of, or
waivers or consents under, this Guaranty Agreement) shall be given or made by
telex, telegraph, telecopy, cable, or in writing and telexed, telecopied,
telegraphed, cabled, mailed, or delivered to the attention of an Authorized
Representative of the intended recipient at the "Address for Notices" specified
below its name in the signature pages hereof; or, as to any party, at such
other address as shall be designated by such party in a notice to each other
party given in accordance with this Section. Except as otherwise provided in
this Guaranty Agreement, all such communications shall be deemed to have been
duly given or made when transmitted by telex or telecopy to the attention of an
Authorized Representative of the intended recipient, subject to telephone
confirmation of receipt by any Person, or delivered to the telegraph or cable
office, subject to telephone confirmation of receipt by any Person, or when
personally delivered or, in the case of a mailed notice certified mail return
receipt requested, within three Business Days of the day when duly deposited in
the mails, in each case given or addressed to the attention of an Authorized
Representative of the intended recipient as aforesaid.

Section 7.5 Setoff. Bank shall have the right to set off and
apply against the Guaranteed Obligations in such manner as Bank may determine,
at any time and without notice to KCS, or Proliq or any other Person, any and
all deposits (general or special, time or demand, provisional or final) or
other sums at any time credited by or owing from Bank to KCS up or Proliq on
the occurrence of a Default described in Section 11.1(f) of the Credit
Agreement or an Event of Default, whether or not the Guaranteed Obligations are
then due. As further security for the Guaranteed Obligations, KCS and Proliq
each hereby grants to Bank a security interest in all money, instruments, and
other Property of it now or hereafter held by Bank, including, without
limitation, Property held in safekeeping. In, addition to Bank's right of
setoff and as further security for the Guaranteed

-24-
<PAGE> 25
Obligations, KCS and Proliq each hereby grants to Bank a security interest in
all deposits (general or special, time or demand, provisional or final) and
other accounts of KCS or Proliq now or hereafter on deposit with or held by
Bank and all other sums at any time credited by or owing from Bank to KCS or
Proliq . The rights and remedies of Bank hereunder are in addition to other
rights and remedies (including, without limitation, other rights of setoff)

Section 7.6 Applicable Law. THIS GUARANTY AGREEMENT AND EACH OF
THE OTHER LOAN DOCUMENTS TO WHICH KCS OR PROLIQ IS A PARTY (EXCEPT TO THE
EXTENT OTHERWISE EXPRESSLY PROVIDED IN ANY OF THEM) SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS AND TO THE EXTENT
APPLICABLE, LAWS OF THE UNITED STATES OF AMERICA, THIS GUARANTY AGREEMENT AND
EACH OF THE OTHER LOAN DOCUMENTS TO WHICH KCS OR PROLIQ IS A PARTY HAVE BEEN
ENTERED INTO IN HARRIS COUNTY, TEXAS, AND EACH SHALL BE PERFORMABLE BY KCS OR
PROLIQ FOR ALL PURPOSES IN HARRIS COUNTY, TEXAS.

Section 7.7 Submission to Jurisdiction; Waivers. TO THE MAXIMUM
EXTENT NOT EXPRESSLY PROHIBITED BY APPLICABLE LAW FROM TIME TO TIME IN EFFECT,
EACH OF KCS AND PROLIQ HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY (AND
AFTER IT HAS CONSULTED WITH ITS OWN ATTORNEY) IRREVOCABLY AND UNCONDITIONALLY:

(i) SUBMITS FOR ITSELF AND ITS PROPERTY IN ANY LEGAL
ACTION OR PROCEEDING RELATING TO THIS GUARANTY AGREEMENT OR ANY OTHER
LOAN DOCUMENTS OR FOR RECOGNITION AND ENFORCEMENT OF ANY JUDGMENT IN
RESPECT THEREOF, TO THE NON-EXCLUSIVE GENERAL JURISDICTION OF THE
COURTS OF HARRIS COUNTY, TEXAS, THE COURTS OF THE UNITED STATES OF
AMERICA FOR THE SOUTHERN DISTRICT OF TEXAS, HOUSTON DIVISION, AND
APPELLATE COURTS FROM ANY THEREOF;

(ii) CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY BE
BROUGHT IN SUCH COURTS, AND WAIVES ANY OBJECTION THAT IT MAY NOW OR
HEREAFTER HAVE TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING IN ANY
SUCH COURT OR THAT SUCH ACTION OR PROCEEDING WAS BROUGHT IN AN
INCONVENIENT COURT AND AGREES NOT TO PLEAD OR CLAIM THE SAME;

(iii) AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR
PROCEEDING MAY BE EFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR
CERTIFIED MAIL, RETURN RECEIPT REQUESTED (OR ANY SUBSTANTIALLY SIMILAR
FORM OF MAIL), POSTAGE PREPAID, TO SUCH PERSON AT ITS ADDRESS REFERRED
TO IN SECTION 7.4 HEREOF, ATTENTION TO AN AUTHORIZED REPRESENTATIVE OF
SUCH PERSON (WITH COPY

-25-
<PAGE> 26
THEREOF, SO MAILED, TO ORLOFF, LOWENBACH, STIFELMAN & SIEGEL, P.A.,
101 EISENHOWER PARKWAY, ROSELAND, NEW JERSEY 07068-1082, ATTENTION:
MR. RALPH M. LOWENBACH) OR AT SUCH OTHER ADDRESS OR ADDRESSES OF WHICH
BANK SHALL HAVE BEEN NOTIFIED PURSUANT HERETO;

(iv) AGREES THAT NOTHING HEREIN SHALL AFFECT THE RIGHT TO
EFFECT SERVICE OF PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR
SHALL LIMIT THE RIGHT TO SUE IN ANY OTHER JURISDICTION; AND

(v) IN RECOGNITION THAT IT MAY BE ENTITLED TO A TRIAL IN
WHICH MATTERS OF FACT ARE DETERMINED BY A JURY (AS OPPOSED TO A TRIAL
IN WHICH SUCH MATTERS ARE DETERMINED BY A PRESIDING JUDGE), WAIVES ANY
RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT TO ANY LITIGATION
DIRECTLY OR INDIRECTLY AT ANY TIME ARISING OUT OF, UNDER, OR IN
CONJUNCTION WITH, THIS GUARANTY AGREEMENT OR ANY OTHER LOAN DOCUMENTS,
OR ANY OF THE TRANSACTIONS PROVIDED FOR HEREIN OR THEREIN OR
CONTEMPLATED HEREBY OR THEREBY, WHETHER BEFORE OR AFTER MATURITY AND
WHETHER OR NOT COMMENCED BY OR AGAINST IT.

Section 7.8 Severability. If any provision of this Guaranty
Agreement or any other Loan Document to which KCS or Proliq is a party is held
to be illegal, invalid or unenforceable under present or future laws, such
provision shall be fully severable to the extent required by the jurisdiction
whose laws rendered such provision illegal, invalid or unenforceable; and the
remaining provisions of this Guaranty Agreement and of each of the other Loan
Documents to which KCS or Proliq is a party and, if not affected by the laws of
the jurisdiction rendering such provision illegal, invalid or unenforceable,
then, as to all other jurisdictions, all provisions hereof and thereof, shall
remain in full force and effect and shall not be affected by such provision or
by its severance. Upon any one or more provisions of this Guaranty Agreement
or any other Loan Documents to which KCS or Proliq is a party being held
illegal, invalid or unenforceable, the parties hereto agree promptly to meet
and to negotiate a replacement provision or provisions as similar as possible
to that which it replaces, and until such negotiation is completed, each party
hereto hereby agrees that there shall be deemed automatically included in such
document a provision or provisions as similar in terms to such illegal, invalid
or unenforceable provision as may be legal, valid and enforceable. In
furtherance of the foregoing, but in no manner limiting the generality thereof,
to the extent that the undertaking to indemnify, pay and hold harmless set
forth in any section or provision of this Guaranty Agreement or any other Loan
Documents to which KCS or Proliq is a party may be unenforceable because it is
violative of any law or public policy as determined by the final unappealable
judgment or order of a court of competent jurisdiction, each indemnifying party
agrees, jointly and severally, that it shall contribute the maximum portion
which it is permitted to pay and satisfy under applicable law, to the payment
and satisfaction of all such indemnified matters incurred by the applicable
indemnitees.

-26-
<PAGE> 27
Section 7.9 No Control. None of the covenants, terms or other
provisions of this Guaranty Agreement or any other Loan Documents to which KCS
or Proliq is a party or any document executed in conjunction herewith or
therewith or related hereto or thereto shall, or shall be deemed to, give Bank
the rights or powers to exercise control over, or participate in the management
of, the business, affairs, operations or management (financial or otherwise) of
any of KCS or any of its Subsidiaries, including, without limitation, any right
or power to influence or affect any of their treatment of hazardous wastes or
hazardous waste disposal decisions; any and all implications or inferences
regarding the existence of any such rights or powers are hereby expressly
negated. The relationship between Bank and KCS and Bank and Proliq created by
this Guaranty Agreement is only that of guarantee beneficiary- guarantor and/or
lien grantee-lien grantor, as applicable, and the rights, remedies, Liens and
powers of Bank hereunder are limited to the rights to receive payment of the
Guaranteed Obligations and to exercise the Liens, rights, powers and remedies
provided herein and in any other document executed in conjunction herewith or
therewith or related hereto or thereto.

Section 7.10 Construction. KCS and Proliq acknowledge that it has
had the benefit of legal counsel of its own choice and has been afforded an
opportunity to review this Guaranty Agreement and the other Loan Documents to
which it is a party with its legal counsel and that this Agreement and the
other Loan Documents to which KCS or Proliq is a party shall be construed as if
jointly drafted by each of them.

Section 7.11 Entire Agreement. KCS AND PROLIQ ACKNOWLEDGE THAT
THIS WRITTEN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND
MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT
ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN
THE PARTIES.

Section 7.12 Credit Agreement and Other Loan Documents Distinct
from Guaranty Agreement. KCS acknowledges and agrees that this Guaranty
Agreement is an independent and distinct document with respect to the Credit
Agreement. KCS and Proliq acknowledge and agree that it is not a party to the
Credit Agreement or any other Loan Document to which it is not specifically a
signatory and, therefore, is not entitled to any rights or benefits thereunder,
directly or indirectly, other than as specifically set forth therein. KCS
acknowledges and agrees that it has been provided and has available to it a
copy of the Credit Agreement and each of the other Loan Documents and,
furthermore, agrees that it has read and understands it and at all times has
had and will have available to it a copy of the Credit Agreement and other the
Loan Documents to enable it to review and become familiar with the terms and
provisions that are referenced herein and therein including, without
limitation, the defined terms, and uses thereof, therein. Notwithstanding the
foregoing, KCS acknowledges its understanding and familiarity with the Credit
Agreement and the other Loan Documents enabling it to fully, timely and
completely comply with and perform the provisions of this Guaranty Agreement.
No such reference to the Credit Agreement or any other Loan Document shall
release, impair, diminish or otherwise adversely affect Guarantor's
obligations, acknowledgments, waivers and agreements set forth herein, or the
rights, remedies, privileges and benefits of Bank in respect thereto or
hereunder.

-27-
<PAGE> 28
Section 7.13 Successors and Assigns. This Guaranty Agreement (i)
is and shall be in every particular available to, and inure to the benefit of,
the successors and assigns of Bank and each and every Person who shall from
time to time be or become the owner or holder of any of the Guaranteed
Obligations, and each and every reference herein to "Bank" shall also include
and refer to each and every such successor, assign, owner or holder, and (ii)
is and shall always be fully binding upon the legal representatives, successors
and assigns of Guarantor, notwithstanding, among other matters, that some or
all of the monies, the repayment of which this Guaranty Agreement applies, may
be actually advanced after any bankruptcy, receivership, reorganization or
other event affecting Guarantor. This Guaranty Agreement shall be transferable
and negotiable, with the same force and effect and to the same extent that the
Guaranteed Obligations are transferable, it being understood and stipulated
that upon the assignment or transfer by Bank of any of the Guaranteed
Obligations, the legal holder or owner of said Guaranteed Obligations (or part
thereof or interest therein thus transferred or assigned by Bank) shall also,
unless provided otherwise by Bank in its assignment, have and may exercise all
of the rights granted to Bank under this Guaranty Agreement to the extent of
the part of or interest in the Guaranteed Obligations thus assigned or
transferred to said Person. Guarantor expressly waives notice of transfer or
assignment of the Guaranteed Obligations, or any part thereof, or of the rights
of Bank hereunder.

Section 7.14 Bank as Sole Beneficiary. All covenants, warranties,
representations, and other terms and provisions of, and applicable to,
Guarantor are imposed solely and exclusively for the benefit of Bank and its
successors and assigns, including, without limitation, participants and Persons
with whom other shared credit arrangements are made, and no other Person shall
have standing to require satisfaction of, and no other Person shall, under any
circumstances, be deemed to be a beneficiary of, such conditions, covenants,
warranties, representations and other terms and provisions. The breach of, or
noncompliance with, any such covenants, warranties, representations and other
terms and provisions may be freely waived in whole or in part by Bank (subject
to Section 12.14(b). of the Credit Agreement) at any time if in its sole
discretion it deems it advisable to do so. No such covenants, warranties,
representations or other terms or provisions are intended to release, or
authorize or permit a breach by, Guarantor of any of its obligations and
requirements to any third Person, or any noncompliance therewith, or to
evidence the contractual interference therewith by Bank.

Section 7.15 Subordination. If, for any reason whatsoever,
Borrower is now or hereafter becomes indebted to Guarantor, such indebtedness,
and all interest thereon and all other amounts payable with respect thereto,
shall, at all times, be subordinate in payment and all other respects to the
Guaranteed Obligations, and Guarantor shall not be entitled to enforce or
receive payment thereof until the Guaranteed Obligations have been fully and
finally paid, save and except as expressly provided in Section 10.5(b) of the
Credit Agreement.

Section 7.16 Suits, etc. It is agreed that suit may be brought
against Guarantor without impairing or releasing the rights of Bank against any
other Person, and either with or without making any Borrower or any other
Person a party to such suit (as Bank may elect), and that Bank may

-28-
<PAGE> 29
compound or compromise or settle with Guarantor for such sum or sums, if any,
as it may see fit and may in its discretion release any one or more other
Persons from any or all further liability to Bank for the Guaranteed
Obligations (with or without receiving payment of any part of said Guaranteed
Obligations or other consideration incident to such release) without impairing,
affecting or releasing the right of Bank to demand and collect the entire
unpaid balance of the Guaranteed Obligations, up to the full amount thereof,
from Guarantor not so released.

Section 7.17 Counterparts. This Guaranty Agreement may be
executed in one or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same
instrument.

Section 7.18 Amendment. The provisions of this Guaranty Agreement
may be amended or waived only by an instrument in writing signed by Bank, KCS
and Proliq which instrument shall be in form, scope and substance satisfactory
to Bank and shall be subject to such conditions and/or requirements as Bank
shall require.

-29-
<PAGE> 30
WITNESS THE EXECUTION HEREOF, as of the day and year first above
written.

KCS ENERGY, INC.

By:
--------------------------------------------
Henry A. Jurand, Vice President,
Treasurer and Secretary

Address for Notices:

379 Thornall Street
Edison, New Jersey 08837
Attn: Authorized Representative
(as defined herein and addressed
as expressly required hereby)
Telecopy: (908) 603-8960

Principal Place of Business

379 Thornall Street
Edison, New Jersey 08837

PROLIQ, INC.

By:
-------------------------------------------
Name:
--------------------------------------
Title:
-------------------------------------

Address for Notices:

379 Thornall Street
Edison, New Jersey 08837
Attn: Authorized Representative
(as defined herein and addressed
as expressly required hereby)
Telecopy: (908) 603-8960

Principal Place of Business

379 Thornall Street
Edison, New Jersey 08837

-30-
<PAGE> 31

-31-

<PAGE> 1
Exhibit 10.3
================================================================================

LOAN AGREEMENT

Dated as of January 11, 1995

among

KCS ENERGY MARKETING, INC.,
as Borrower,

KCS ENERGY, INC. and
PROLIQ, INC.,
each as a Guarantor,

and

CANADIAN IMPERIAL BANK OF COMMERCE,
as Lender.

================================================================================

<PAGE> 2

LOAN AGREEMENT

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
SECTION 1. DEFINITIONS ............................... 1

SECTION 2. THE LOANS ................................. 21
2.1 Loans ................................... 21
2.2 Note .................................... 22
2.3 Loan Requests ........................... 22
2.4 The Loan Commitment ..................... 23
2.5 Mandatory Payments ...................... 23

SECTION 3. TERMS APPLICABLE TO LOANS ................. 24
3.1 Payments and Prepayments ................ 24
3.2 Maximum Interest ........................ 27
3.3 Computations ............................ 27
3.4 Minimum Amounts ......................... 27

SECTION 4. TERMINATION ............................... 27
4.1 Credit Expiration Date .................. 27
4.2 Termination by the Borrower ............. 27

SECTION 5. YIELD PROTECTION AND ILLEGALITY ........... 28
5.1 Additional Costs ........................ 28
5.2 Limitation on Types of Loans ............ 29
5.3 Illegality .............................. 30
5.4 Certain Conversions Pursuant to Sections
5.1, 5.2 and 5.3 ...................... 30
5.5 Compensation ............................ 30

SECTION 6. REPRESENTATIONS AND WARRANTIES ............ 31
6.1 Organization, Powers, etc. .............. 31
6.2 Corporate Authority, etc. ............... 32
6.3 Government Approvals .................... 32
6.4 Government Regulation ................... 32
6.5 Valid and Binding Obligations ........... 33
6.6 Litigation .............................. 33
6.7 Use of Proceeds ......................... 33
6.8 Accuracy of Information ................. 33
6.9 Accuracy of Representations and
Warranties ........................... 33
6.10 Financial Position ...................... 33
6.11 Pledge of Collateral .................... 34
</TABLE>

<PAGE> 3

<TABLE>
<S> <C>
6.12 Title to Assigned Collateral ............ 34
6.13 Tax Returns ............................. 34
6.14 ERISA ................................... 35
6.15 No Material Adverse Change .............. 35
6.16 Compliance with Laws .................... 35
6.17 Chief Place of Business ................. 36
6.18 Lock-Box Banks; Lock-Box Accounts ....... 36
6.19 Franchises, Licenses, Trademarks and
other Rights .......................... 36
6.20 No Default .............................. 36
6.21 Capital Stock ........................... 36
6.22 Trade Names, etc. ....................... 37

SECTION 7. CONDITIONS PRECEDENT ...................... 37
7.1 No Default .............................. 37
7.2 Opinions of Counsel ..................... 38
7.3 Other Supporting Documents .............. 38
7.4 Control of Proliq and the Borrower ...... 39
7.5 Loan Request ............................ 40
7.6 Fees Paid ............................... 40
7.7 Representations and Warranties .......... 40

SECTION 8. AFFIRMATIVE COVENANTS ..................... 40
8.1 Payment of Taxes, etc. .................. 40
8.2 Preservation of Corporate Existence ..... 40
8.3 Compliance with Laws, etc. .............. 41
8.4 Inspection Rights ....................... 41
8.5 Maintenance of Approvals, Filings and
Registrations ......................... 41
8.6 Reporting Requirements .................. 41
8.7 Performance of Agreements ............... 45
8.8 Notices ................................. 45
8.9 Compliance with Policies and Contracts... 46
8.10 Instructions to Obligors ................ 46
8.11 Books and Records ....................... 46
8.12 Further Assurances ...................... 46
8.13 Other Agreements ........................ 46
8.14 Insurance ............................... 47

SECTION 9. NEGATIVE COVENANTS ...................... 47
9.1 Use of Proceeds ......................... 47
9.2 Financial Covenants ..................... 47
9.3 Amendments .............................. 48
9.4 Maximum Credits Outstanding ............. 48
9.5 Prohibition of Fundamental Changes ...... 48
9.6 Dividends ............................... 49
9.7 Business ................................ 49
9.8 No Commingling .......................... 49
</TABLE>

ii
<PAGE> 4

<TABLE>
<S> <C>
9.9 Capital Stock ........................... 49

SECTION 10. PORTFOLIO EVENTS ........................ 50
10.1 Portfolio Events......................... 50

SECTION 11. EVENTS OF DEFAULT ......................... 51
11.1 Events of Default ....................... 51

SECTION 12. FEES ...................................... 55
12.1 Structuring Fee and Commitment Fee ...... 55
12.2 Expenses ................................ 55
12.3 Invoices for Fees ....................... 55

SECTION 13. GUARANTY .................................. 56
13.1 The Guaranty ............................ 56
13.2 Obligations Absolute; Enforceability .... 58
13.3 Waiver of Subrogation and Contribution .. 60

SECTION 14. INDEMNIFICATION ........................... 60
14.1 Indemnification by the Borrower ......... 60
14.2 Notices ................................. 62

SECTION 15. MISCELLANEOUS ............................. 62
15.1 Notices ................................. 62
15.2 Survival and Termination of Agreement ... 65
15.3 Applicable Law .......................... 65
15.4 Waiver; Modifications in Writing ........ 65
15.5 Non-Waiver of Rights .................... 66
15.6 Successors and Assigns .................. 66
15.7 Right to Grant Assignments and
Participations ........................ 67
15.8 Captions ................................ 67
15.9 Counterparts ............................ 67
15.10 Severability ............................ 67
15.11 Waiver of Trial by Jury; Consent to
Jurisdiction .......................... 67
15.12 Set-off ................................. 68

</TABLE>

iii

<PAGE> 5

SCHEDULES

Schedule 1 - List of Booking Offices

Schedule 2 - List of Special Concentration Limits

Schedule 3 - List of Lock-Boxes

Schedule 4 - List of Volumetric Production Contracts

Schedule 6.22 - Trade Names

Schedule 6.6 - Pending Litigation

Schedule 8.6(g) - Mid-Month Report

<PAGE> 6

EXHIBITS

Exhibit A - Form of Note

Exhibit B - Form of Certificate

Exhibit C - Form of Guarantor Certificate

Exhibit D - Form of Security Agreement

Exhibit E - Form of Pledge Agreement

Exhibit F - Form of Loan Request

Exhibit G - Form of Notice of Conversion or
Continuation

Exhibit H - Form of Receivables Activity Report

<PAGE> 7

LOAN AGREEMENT

LOAN AGREEMENT dated as of January 11, 1995 among KCS ENERGY MARKETING,
INC., a New Jersey corporation (the "Borrower"), KCS ENERGY, INC., a Delaware
corporation (the "Parent"), PROLIQ, INC., a New Jersey corporation ("Proliq"
and, together with the Parent, the "Guarantors") and CANADIAN IMPERIAL BANK OF
COMMERCE (the "Lender").

SECTION 1. DEFINITIONS

The capitalized terms used in this Agreement shall have the following
meanings, unless otherwise defined herein.

Additional Costs: has the meaning assigned to that term in
Section 5.1 of this Agreement.

Adjusted Consolidated Principal Debt: an amount, determined on a
consolidated basis of the Parent and its Subsidiaries, equal to (without
duplication) the sum of (i) an amount equal to one-third (1/3) of the sum of the
Total Credit Principal plus the Letter of Credit Exposure, and (ii) all current
maturities of all other long-term Debt.

Agreement: this Loan Agreement, as the same from time to time may be
extended, amended, supplemented, waived or modified and in effect.

Alternate Base Rate: a fluctuating rate of interest per annum equal to
the highest of

(a) the rate of interest most recently announced by the Lender at its
Booking Office as its base rate;

(b) the CD Published Moving Rate most recently determined by the
Lender, plus 1/2 of 1% per annum; and

The Alternate Base Rate is not necessarily intended to be the lowest rate of
interest determined by the Lender in connection with extensions of credit.
Changes in the rate of interest on any Loan maintained as an Alternate Base Rate
Loan shall take effect simultaneously with each change in the Alternate Base
Rate. The Lender shall give notice promptly to the Borrower of changes in the
Alternate Base Rate.

<PAGE> 8

Alternate Base Rate Loan: a Loan bearing interest based on the
Alternate Base Rate.

Applicable Laws and Applicable Law: respectively, (i) all applicable
laws and treaties, judgments, decrees, injunctions, writs and orders of any
court, arbitrator or governmental agency or authority and rules, regulations,
orders, licenses and permits of any governmental body, instrumentality, agency
or authority, and (ii) any of the foregoing.

Assigned Collateral: has the meaning assigned to that term in Section
4.1 of the Security Agreement.

Average Maturity: on any day, that period (expressed in days) equal to
the weighted average maturity of the Receivables, as set forth in the most
recent Receivables Activity Report; provided, however, that if the Lender shall
reasonably disagree with any such calculation, the Lender may recalculate the
Average Maturity with respect to such day (which calculation shall be conclusive
absent demonstrable error).

Bay Springs Subordinated Debt: the indebtedness of KCS Resources, Inc.,
a Delaware corporation, evidenced by the Subordinated Non-Negotiable Promissory
Note dated January 1, 1993, payable to Esenjay Petroleum Corporation and in the
original principal amount of $5,560,500, together with any and all renewals,
extensions and rearrangements of such indebtedness, and as the same is more
particularly defined in the KCS Credit Agreement.

Booking Office: with respect to any Eurodollar Loans or Alternate Base
Rate Loans, the respective office of the Lender or an affiliate designated as
its "Eurodollar Lending Office" or "Alternate Base Rate Lending Office",
respectively, in Schedule 1 to this Agreement; provided, that the Lender may
designate a different Booking Office with respect to its Eurodollar Loans or
Alternate Base Rate Loans from time to time upon notice to the Borrower;
provided, further, that the Alternate Base Rate Lending Office of the Lender
shall be located in the United States.

Borrower: has the meaning assigned to such term in the introduction to
this Agreement.

<PAGE> 9

Borrowing Base: at any time of determination, 100% of the aggregate
outstanding balance of all Eligible Receivables at such time less the sum
determined at such time of the items set forth in (i) through (vii) below:

(i) the Reserve;

(ii) the aggregate amount by which the outstanding balance of
Eligible Receivables not required to be paid until a date at
least 31 days, but no more than 45 days, after the billing date
thereof exceeds $300,000;

(iii) the aggregate amount by which the outstanding balance of UCC
9.319 Receivables exceeds the UCC 9.319 Receivable Limit;

(iv) the aggregate amount by which the outstanding balance of
Project Receivables exceeds the Project Receivables Limit;

(v) the aggregate amount by which the outstanding balance of
Eligible Receivables of each Obligor exceeds the Standard
Concentration Limit or the Special Concentration Limit with
respect to such Obligor less, with respect to each Obligor
which is a Project, the amount specified in clause (vi) below
due from a single entity described therein to such Project;

(vi) the aggregate amount by which the outstanding balance of
Receivables due from a single entity to one or more Projects
exceeds the Standard Concentration Limit or any applicable
Special Concentration Limit; and

(vii) an amount equal to the positive result, if any, between (a) the
product of (1) the outstanding balance of Eligible Receivables
as at the end of the full calendar month most recently
completed, (2) 2.00 and (3) the highest of the fractions
determined for each full calendar month during the period of
twelve (12) full calendar months

<PAGE> 10
preceding the date of determination obtained by dividing (A)
the aggregate amount of Dilutions for each such full calendar
month by (B) the outstanding balance of Receivables as at the
end of the full calendar month most recently completed, less
(b) the Standard Concentration Limit.

Business Day: any day other than a Saturday, Sunday or a day when banks
are authorized or required by law to close in New York, New York and, if such
day relates to a borrowing of, a payment or prepayment of principal of, or
interest on, or a conversion of or into, or an Interest Period for, a Eurodollar
Loan or a notice by the Borrower with respect to any such borrowing, payment,
prepayment, conversion or Interest Period, any day which is also a London
Banking Day.

Capital Lease: as applied to any Person, any lease of any property
(whether real, personal or mixed) by such Person as lessee which, in conformity
with GAAP, is accounted for as a capital lease on the balance sheet of such
Person.

Capital Stock: with respect to any Person, any capital stock of such
Person, regardless of class or designation, and all warrants, options, purchase
rights, conversion or exchange rights, voting rights, calls or claims of any
character with respect thereto.

CD Published Moving Rate: at any time, the latest three-week moving
average of daily secondary market morning offering rates in the United States
for three-month certificates of deposit of major United States money market
banks, such three-week moving average being determined weekly on the second
Business Day of each week by the Lender on the basis of:

(a) such rates reported by certificate of deposit dealers to, and
published by, the Federal Reserve Bank of New York; or

(b) if such publication is suspended or terminated, the rate of
interest determined by the Lender to be the average of the bid rates quoted
to the Lender by two certificate of deposit dealers of recognized standing
selected by the Lender (in its sole

<PAGE> 11
discretion) for the purchase at face value of three-month certificates of
deposit in an amount approximately equal or comparable to the Alternate Base
Rate Loan with respect to which the computation is being made,

in either case rounded upwards, if necessary, to the next higher 1/16 of 1%.

Code: the Internal Revenue Code of 1986, as amended.

Commitment Expiration Date: June 11, 1996; provided, that such
Expiration Date may be extended for an additional six calendar months on the
last Business Day of June and December of each year, commencing with June, 1995,
if the Borrower gives the Lender written notice not later than thirty (30) days
prior to the end of June or December, as the case may be, and the Lender
provides the Borrower with its written consent to such extension not later than
thirty (30) days after receipt of the Borrower's notice.

Commitment Fee: the fee described in Section 12.1(ii) of this
Agreement.

Consolidated Cash Flow: for the four (4) fiscal quarter period then
ended, an amount determined on a consolidated basis for the Parent and its
Subsidiaries, equal to (without duplication) the sum of (i) net income (reduced
by the matters set forth in clauses (i) through (v) in the definition of
Consolidated Net Income, to the extent each is included in such net income),
(ii) all deferred taxes, including, but without limitation, federal income
taxes, and (iii) depreciation, depletion and amortization.

Consolidated Current Assets: at any time, all amounts which, in
conformity with GAAP, would be included as current assets on a consolidated
balance sheet of the Parent and its Subsidiaries.

Consolidated Current Liabilities: at any time, all amounts which, in
conformity with GAAP, would be included on a consolidated balance sheet of the
Parent and its Subsidiaries as current liabilities; provided, however, current
liabilities shall exclude current maturities of the Bay Springs Subordinated
Debt.

Consolidated Net Income: with respect to the corresponding reporting
period, the consolidated net

<PAGE> 12

earnings of the Parent and its Subsidiaries (stated as a positive amount) as
reflected in each of the periodic consolidated statements of income of the
Parent and its Subsidiaries that are required to be furnished pursuant to
Section 8.6 of this Agreement, but excluding therefrom, to the extent included
in the calculation of such net earnings, the following: (i) any gain arising
from the sale of capital assets, which sale does not occur in the ordinary
course of business of the Person making such sale; (ii) any gain arising from
any write-up of assets; (iii) the earnings of any other Person substantially all
of the assets of which have been acquired by the Parent or any of its
Subsidiaries in any manner, to the extent such earnings were realized by such
other Person prior to the date of such acquisition; (iv) the earnings of any
Person to which substantially all of the assets of the Parent or any of its
Subsidiaries shall have been sold, transferred or disposed of, or into which the
Parent or its Subsidiaries shall have merged, to the extent that such earnings
were realized prior to the date of such transaction; and (v) any gain arising
from the acquisition of any securities of the Parent or its Subsidiaries.

Consolidated Tangible Net Worth: at any time, (i) all amounts which, in
conformity with GAAP, would be included as stockholders' equity on a
consolidated balance sheet of the Parent and its Subsidiaries, plus (ii) the
unamortized balance of investment tax credits, plus (iii) the unamortized
balance of gain from the sale of Utility Propane Company; provided, however,
there shall be excluded therefrom (without duplication): (A) any amount at which
shares of capital stock of the Parent or any of its Subsidiaries appear as an
asset on such balance sheet, (B) goodwill, including any amounts, however
designated, that represent the excess of the purchase price paid for assets or
stock over the value assigned thereto, (C) patents, trademarks, trade names,
copyrights, licenses, permits, franchises and research and development expenses,
(D) deferred assets and deferred expenses, (E) unamortized debt discount and
related expenses, and (F) all other assets which are properly classified as
intangible assets.

Contingent Obligation: any contractual obligation, contingent or
otherwise, of one Person with respect to any Indebtedness, obligation or
liability of another, including, without limitation, direct or indirect
guaranties, endorsements (except for collection or deposit in the ordinary
course of business), notes co-made or discounted,

<PAGE> 13

recourse agreements, keep-well agreements, agreements to purchase or repurchase
such Indebtedness, obligation or liability or any security therefor or to
provide funds for the payment or discharge thereof, agreements to maintain
solvency, assets, level of income, or other financial condition, and agreements
to make payment other than for value received.

Credit Expiration Date: has the meaning set forth in Section 4.1 of
this Agreement.

Debt: for the Parent and its Subsidiaries on a consolidated basis
(without duplication): (i) all indebtedness, whether or not represented by
bonds, debentures, notes, securities or other evidences of indebtedness, for the
repayment of borrowed money, (ii) all indebtedness representing the deferred
payment of the purchase price of Property, assets or services, other than trade
payables incurred in the ordinary course of business, (iii) all indebtedness
under any lease which, in conformity with GAAP, is required to be capitalized
for balance sheet purposes, (iv) all indebtedness under guaranties (other than
guaranties by the Parent of trade payables of its Subsidiaries), endorsements
(other than for collection or deposit in the ordinary course of business),
assumptions, or other contingent obligations, in respect of, or to purchase or
otherwise acquire, indebtedness of others, other than, as to the Parent, a
Subsidiary of the Parent, (v) all indebtedness secured by a Lien existing on
Property owned by the Person, whether or not the indebtedness secured thereby
shall have been assumed, the aggregate amount of such indebtedness being equal
to the aggregate fair market value of such encumbered Property, (vi) all
indebtedness (whether contingent or otherwise) in respect of letters of credit,
bankers' acceptances, surety or other bonds and similar instruments (other than
contingent indebtedness of the Borrower in respect of standby and/or documentary
letters of credit issued for the account of the Borrower to secure the payment
obligations of the Borrower under specific natural gas purchase contracts
entered into in the ordinary course of business, which specific natural gas
purchase contracts are specifically dedicated to then in force specific gas
sales contracts of the Borrower; provided, however, that (1) the aggregate face
amount of all such standby letters of credit and documentary letters of credit
outstanding at any time shall not exceed $8,000,000, (2) no such standby letter
of credit or documentary letter of credit, as applicable, shall (A) remain
outstanding for a period in excess of 60

<PAGE> 14

days, with respect to a standby letter of credit, or for a period in excess of a
normal and customary period for documentary letters of credit issued in the
ordinary course for comparable transactions, with respect to a documentary
letter of credit, or (B) be guaranteed by any Person (other than the Parent) or
secured by any Lien on any Property (other than Property of the Borrower) and
(3) the amount of any draw or other advance made under any such standby letter
of credit or documentary letter of credit, as applicable, that is not reimbursed
to the issuer of such standby letter of credit or documentary letter of credit,
as applicable, within two Business Days after the date of such draw or other
advance shall thereafter constitute Debt until such amount has been so
reimbursed), (vii) all indebtedness and undertakings to maintain or cause to be
maintained the financial position or financial covenants of any other Person
(other than, to the extent permitted, and in connection with, the trade payables
described in clause (iv) above), (viii) any obligation to redeem or repurchase
any of such Person's capital stock, warrants, or stock equivalents, and (ix) the
Bay Springs Subordinated Debt, without reduction of any amounts owed thereunder,
including, without limitation, any current maturities thereof.

Default: an Event of Default, or an event which with the notice or
lapse of time or both would become an Event of Default.

Default Ratio: as of any date of determination, a fraction, expressed
as a percentage, the numerator of which is the sum, without duplication, of (i)
the aggregate outstanding balance of all Receivables that were or should have
been charged-off during the full calendar month most recently completed in
conformity with the Borrower's credit and collection practices and policies with
respect to the Receivables and (ii) the aggregate outstanding balance of all
Receivables (other than Receivables the Obligor of which is a Project that is
not in final commercial operation) that were unpaid for more than 90 days past
the dates on which they were due as of the end of the full calendar month most
recently completed, and the denominator of which is the aggregate outstanding
balance of all Receivables (other than Receivables the Obligor of which is a
Project that is not in final commercial operation) on the last Business Day of
the full calendar month most recently completed.

<PAGE> 15

Defaulted Receivable: any Receivable which:

(1) has been or should have been charged-off in conformity with the
Borrower's credit and collection practices and policies with
respect to the Receivables; or

(2) is owed by an Obligor who is in bankruptcy, reorganization,
insolvency or similar proceedings.

Dilution Ratio: as of any date of determination, a fraction, expressed
as a percentage, the numerator of which shall equal the aggregate amount of
Dilutions for the full calendar month most recently completed and the
denominator of which shall equal the outstanding balance of Receivables as at
the end of such full calendar month.

Dilutions: the aggregate amount of any reductions and cancellations
(net of increases up to the amount of such reductions and cancellations) of
Receivables which have been reduced or canceled, respectively, for any reason
other than that (1) the Obligors have made payments thereon or (2) the Borrower
has charged-off such Receivables in accordance with its credit and collection
practices and policies with respect to the Receivables.

Dollars and $: lawful money of the United States of America.

Effective Date: the first date on which the conditions precedent set
forth in Section 7 have been satisfied or waived and the Lender shall have
delivered a notice to the Borrower to that effect.

Eligible Receivable: any Receivable:

(1) which is not unpaid for more than 60 days past the date on which
it was due;

(2) which is required to be paid in full within 45 days of the billing
date;

(3) which is payable only in U.S. dollars;

(4) which is not a Defaulted Receivable;

(5) which is not an Ineligible Receivable;

<PAGE> 16

(6) the Obligor of which has had no Defaulted Receivable at any time
during the immediately preceding 12-month period;

(7) the Obligor of which does not have more than 10% of its total
Receivables unpaid for more than 90 days past the dates on which
they were due;

(8) the Obligor of which is a U.S. resident, is not an affiliate of
the Borrower and is not a government or subdivision or agency of a
government;

(9) the Obligor of which, if a Project, (i) is not in default under
any contracts or agreements to which it is a party, including
contracts and agreements with its lenders or power purchasers,
(ii) is in final commercial operation and (iii) meets all
operating performance requirements under its construction contract
and power purchase contracts;

(10) which is not subject to any dispute, claim, defense or offset,
except, in the case of any UCC 9.319 Receivable, the rights
described in the definition of such term;

(11) which is an "account" within the meaning of the Uniform Commercial
Code of the State in which is located the Borrower's place of
business or, if the Borrower has more than one place of business,
its chief executive office;

(12) in which the Borrower has good and marketable title free and clear
of all liens, security interests and encumbrances except (i) in
the case of any UCC 9.319 Receivable, the rights described in the
definition thereof, and (ii) liens, security interests and
encumbrances in favor of the Lender under the Security Agreement;

(13) that is the legal, valid and binding payment obligation of the
Obligor thereon;

<PAGE> 17

(14) which does not contravene any applicable law, rule or regulation
in any material respect;

(15) which is not subject to any restrictions on the transfer,
assignability or sale thereof;

(16) which satisfies all applicable credit and collection practices and
policies of the Borrower with respect to the Receivables; and

(17) which was generated in the ordinary course of the Borrower's
business by the Gas Marketing division or Energy Management
Services division of the Borrower.

ERISA: the Employee Retirement Income Security Act of 1974, as
amended.

ERISA Affiliate: (i) any corporation which is a member of the same
controlled group of corporations (within the meaning of Section 414(b) of the
Code) as the Borrower or as either of the Guarantors; (ii) a trade or business
(whether or not incorporated) which is under common control (within the meaning
of Section 414(c) of the Code) with the Borrower or with either of the
Guarantors; and (iii) a member of the same affiliated service group (within the
meaning of Section 414(m) of the Code) as the Borrower or as either of the
Guarantors, as any corporation described in clause (i) above or as any trade or
business described in clause (ii) above.

Eurodollar Loan: a Loan bearing interest based on the Eurodollar Rate.

Eurodollar Rate: with respect to any Interest Period for any Eurodollar
Loan, the rate per annum determined by the Lender to be equal to the quotient
(rounded upwards, if necessary, to the next higher 1/16 of 1%) of (y) (i) the
rate of interest for deposits in Dollars for a period equal to the number of
days in such Interest Period which appears on the Telerate Page 3750 as of 11:00
a.m., London time, on the day that is two London Banking Days prior to the first
day of such Interest Period, or (ii) if such rate does not appear on the
Telerate Page 3750 at such time, the rate per annum at which deposits in Dollars
are offered by the Lender in immediately available funds at its Eurodollar
Lending Office in an amount comparable to the principal amount of such
Eurodollar Loan

<PAGE> 18
for a period equal to such Interest Period at approximately 10:00 A.M., New York
City time, on the date two Business Days before the first day of such Interest
Period, divided by (z) a number equal to 1.00 minus the Eurodollar Reserve
Percentage.

Eurodollar Reserve Percentage: for any day, the maximum percentage
(expressed as a decimal) specified from time to time by the Board of Governors
of the Federal Reserve System (or any successor) for determining the maximum
reserve requirements (including, but not limited to, supplemental, marginal and
emergency reserves) with respect to eurocurrency funding (currently referred to
as "Eurocurrency Liabilities") of a member bank in such System. The Eurodollar
Rate shall be adjusted automatically with respect to any Eurodollar Loan
outstanding on the effective date of any change in the Eurodollar Reserve
Percentage, as of such effective date.

Event of Default: any of the Events of Default described in
Section 11 of this Agreement.

Guarantors: has the meaning assigned to such term in the introduction
to this Agreement.

Guaranty: the obligations of the Guarantors as set forth in
Section 13.

Federal Bankruptcy Code: Title 11 of the United States Code, Sections
101, et seq., and the rules and regulations promulgated thereunder, as amended
from time to time.

GAAP: generally accepted accounting principles in the United States of
America in effect from time to time.

Governmental Authority: any nation or government, any state or other
political subdivision thereof and any entity exercising executive, legislative,
judicial, regulatory or administrative functions of or pertaining to government.

Guaranteed Obligations: has the meaning assigned to such term in
Section 13.1 hereof.

Historical Default Ratio: as of any date of determination, a
percentage equal to the product of (i) 1.50 and (ii) the greatest of the Default
Ratios determined as of

<PAGE> 19

the day immediately following the end of each full calendar month during the
period of twelve (12) full calendar months preceding the most recently completed
full calendar month.

Indebtedness: with respect to any Person, at any time, (a) all
indebtedness, obligations or other liabilities of such Person (i) for borrowed
money or evidenced by debt securities, debentures, acceptances, notes or other
similar instruments, (ii) under profit payment agreements (other than
profit-sharing or bonus plans or agreements for employees) or in respect of
obligations to redeem, repurchase or exchange any securities of such Person or
to pay dividends in respect of any stock, (iii) with respect to letters of
credit issued for such Person's account, (iv) to pay the deferred purchase price
of property or services, (v) in respect of Capital Leases or (vi) which are
Contingent Obligations, (b) all indebtedness, obligations or other liabilities
of such Person or others secured by a Lien on any property of such Person,
whether or not such indebtedness, obligations or liabilities is or are assumed
by such Person, all as of such time, (c) all indebtedness, obligations or other
liabilities of such Person in respect of currency hedging agreements, net of
liabilities owed to such Person by the counterparties thereon, and (d) all
preferred stock subject (upon the occurrence of any contingency or otherwise) to
mandatory redemption.

Ineligible Receivable: at any time, any Receivable which is a UCC 9.319
Receivable with respect to which (i) the holders of the related liens or
security interests created pursuant to Section 9.319 or the Oil and Gas Lien Act
shall have filed a claim or taken any steps to enforce such liens or security
interests (without regard to the subsequent satisfaction of the UCC 9.319 Claim)
or (ii) the Lender, in its sole discretion, has deemed to be an Ineligible
Receivable.

Interest Period: with respect to any Eurodollar Loan, each period
commencing on the date such Eurodollar Loan is made or converted from an
Alternate Base Rate Loan or the last day of the next preceding Interest Period
with respect to such Eurodollar Loan and ending on the same day in the first
calendar month thereafter, except that each such Interest Period which commences
on the last Business Day of a calendar month (or on any day for which there is
no numerically corresponding day in the appropriate subsequent calendar month)
shall end on the last Business Day of the appropriate subsequent calendar month.

<PAGE> 20

Notwithstanding the foregoing, (i) no Interest Period may extend beyond
the Credit Expiration Date; (ii) each Interest Period which would otherwise end
on a day which is not a Business Day shall end on the next succeeding Business
Day (or, if such next succeeding Business Day falls in the next succeeding
calendar month, on the next preceding Business Day); (iii) each Interest Period
which would otherwise commence before and end after the Credit Expiration Date
shall end on the Credit Expiration Date; and (iv) notwithstanding clauses (i)
and (iii) above, if any Interest Period would have a duration of less than one
month, such Eurodollar Loans shall be Alternate Base Rate Loans during such
period.

KCS Credit Agreement: the Amended and Restated Credit Agreement dated
as of September 29, 1994 among KCS Resources, Inc., KCS Pipeline Systems, Inc.,
Bank One, Texas, National Association, for itself and as agent for the financial
institutions party thereto, and CIBC, Inc., as the same may be amended,
extended, supplemented or otherwise modified from time to time.

Lender: has the meaning assigned to such term in the introduction to
this Agreement.

Letter of Credit Exposure: at any time, without duplication, the sum
of (i) the aggregate undrawn amount of all unexpired Letters of Credit, plus
(ii) the aggregate unpaid amount of all reimbursement obligations of KCS
Resources, Inc. and KCS Pipeline Systems, Inc. at such time due and payable in
respect of drawings made under such Letters of Credit.

Letters of Credit: all standby letters of credit issued by Bank One,
Texas, National Association, pursuant to the KCS Credit Agreement, together with
that certain letter of credit dated March 3, 1994 in the amount of $9,140,000
issued by Bank One, Texas, National Association to Coastal Oil & Gas
Corporation, as beneficiary, for the account of KCS Resources, Inc. and KCS
Pipeline Systems, Inc.

Lien: any mortgage, deed of trust, pledge, security interest,
encumbrance, lien or charge of any kind (including any agreement to give any of
the foregoing, any conditional sale or other title retention agreement, any
lease in the nature thereof, and the filing of or agreement to give any
financing statement under the Uniform Commercial

<PAGE> 21

Code of any jurisdiction in connection with any of the foregoing).

Loan and Loans: respectively, (i) a loan made from time to time by the
Lender to the Borrower under Section 2.1 hereof, and (ii) all of such loans made
by the Lender to the Borrower.

Loan Commitment: $25,000,000.

Loan Documents: this Agreement, the Note, the Security Agreement, the
Pledge Agreement and each other agreement, document or instrument delivered in
connection herewith or therewith.

Loan Request: has the meaning assigned to such term in Section 2.3 of
this Agreement.

Lock-Box: any lock-box(es) or account(s) to which Obligors remit
payments in respect of Receivables.

Lock-Box Agreement: each agreement, in substantially the form of
Exhibit 1.1-L to the Security Agreement, among the Borrower, the Lender and a
Lock-Box Bank.

Lock-Box Bank: any institution at which a Lock-Box is maintained (as
of the date hereof being those institutions specified in Schedule 3 to this
Agreement).

London Banking Day: any day on which dealings in Dollar deposits are
carried out in the London interbank markets.

Mid-Month Report: a mid-month production report to be delivered by the
Borrower in the form of Schedule 8.6(g) to this Agreement.

Multiemployer Plan: a "multiemployer plan" as defined in Section
4001(a)(3) of ERISA which is, or was at any time during the five preceding
years, contributed to by the Borrower, any Subsidiary of the Borrower or any
ERISA Affiliate for the benefit of its employees.

Note: the promissory note issued by the Borrower and payable to the
order of the Lender evidencing the Loans, as provided herein, in substantially
the form attached as Exhibit A to this Agreement.

<PAGE> 22

Notice of Conversion or Continuation: a written notice, in
substantially the form of Exhibit G to this Agreement, delivered by the Borrower
to the Lender pursuant to Section 3.1(c) of this Agreement.

Obligor: any Person which is obligated to make payment on a
Receivable.

Oil and Gas Lien Act: the Oil and Gas Products Lien Act of the State
of New Mexico (N.M. Stat. Ann. 48-9-1 et seq. (1987)), the Oil and Gas Owners'
Lien Act of the State of Oklahoma (Okla. Stat. Ann Tit. 52 Sec. 548 et seq.
(West 1991)), and any comparable provision of the law of any other jurisdiction.

Overnight Funds Rate: for any day, a fluctuating interest rate per
annum equal to the rate of interest offered in the interbank market to the
Lender as the overnight Federal funds rate at or about 10:00 a.m., New York City
time, on such day (or if such day is not a Business Day, for the next preceding
Business Day).

Parent: has the meaning assigned to such term in the introduction to
this Agreement.

PBGC: Pension Benefits Guaranty Corporation or any successor thereto.

Person: an individual, a corporation, a partnership, a joint venture,
a trust or unincorporated organization, a joint stock company or other similar
organization, a government or any political subdivision thereof, a court, or
any other legal entity whether acting in an individual, fiduciary or other
capacity.

Plan: any "employee benefit pension plan" or other "plan" (including a
Multiemployer Plan) established or maintained, as to which contributions have
been made, by any Person for its respective employees and which is covered by
Title IV of ERISA or to which Section 412 of the Code applies.

Pledge Agreement: the Pledge and Security Agreement dated as of
January 11, 1995 between Proliq and the Lender, in substantially the form
attached as Exhibit E to this Agreement, as the same from time to time may be

16
<PAGE> 23
extended, amended, supplemented, waived or modified and in effect.

Pledged Collateral: has the meaning set forth in Section 4.1 of the
Pledge Agreement.

Portfolio Event: any of the Portfolio Events described in Section 10
of this Agreement.

Portfolio Maturity Date: has the meaning assigned to such term in
Section 10.1 of this Agreement.

Post-Default Rate: the Alternate Base Rate as in effect from time to
time plus three percent (3.0%).

Project: an Obligor of the Energy Management Services division of the
Borrower which constructs, operates and/or maintains facilities for the
generation and transmission of electricity.

Project Receivables Limit: at any time of determination, an amount
equal to 25% of the outstanding balance of Eligible Receivables at such time.

Project Receivable: any Receivable with respect to which the Obligor
is a Project.

Proliq: has the meaning assigned to such term in the introduction to
this Agreement.

Property: all types of real, personal tangible, intangible or mixed
property, including fixtures.

Receivable: the obligation of any Person to pay for goods or
merchandise sold or services rendered by the Gas Marketing division and the
Energy Management Services division of the Borrower (whether or not a statement
or invoice has been generated or sent to the Obligor) and includes the
Borrower's rights to payment of any interest or finance charges and in the
merchandise (including returned goods) and contracts relating to such
Receivable, all security interests, guaranties and property securing or
supporting payment of such Receivable, all books and records relating to the
Receivables and all proceeds of the foregoing; provided, that "Receivable" shall
not include (i) the obligation of an Obligor with respect to sales ("Excluded
Sales") of gas or oil by the Borrower, which gas or oil was acquired by the
Borrower pursuant to the

17
<PAGE> 24
volumetric production payment contracts described on Schedule 4 hereto, (ii) the
Borrower's rights to payment of any interest or finance charges relating to
Excluded Sales, (iii) contracts relating to Excluded Sales, (iv) security
interests, guaranties and property securing or supporting payment of Excluded
Sales, (v) books and records relating to Excluded Sales, or (vi) proceeds of
items listed in clauses (i) through (v) above.

Receivables Activity Report: the report to be provided by the Borrower
in the form of Exhibit H hereto.

Regulatory Change: any change in United States federal, state or
foreign laws or the making of any interpretations, directives or requests
applying to a class of banks, including the Lender, under any United States
federal, state, or foreign laws or regulations (whether or not having the force
of law) by any court or governmental or monetary authority charged with the
interpretation or administration thereof.

Reportable Event: any event described in Section 4043(b) of ERISA.

Reserve: as of any date of determination, an amount equal to the
product of (i) the aggregate outstanding principal amount of the Loans, and (ii)
the greater of (a) 12% and (b) a fraction, the numerator of which equals the sum
of the items set forth below (each expressed as a percentage), and the
denominator of which equals 100% minus such sum:

(1) the result of (a) the product of (i) the Standard Concentration
Limit as of such date and (ii) 2, divided by (b) the aggregate
outstanding principal amount of the Loans as of such date;

(2) the product of (a) 2 and (b) the highest of the Default Ratios for
any of the 12 full calendar months immediately preceding such
date;

(3) 1%; and

(4) the product of (a) the sum of (i) the Eurodollar Rate on the
Business Day

<PAGE> 25

immediately preceding such date and (ii) 5.375% and (b) 104/360.

Section 9.319: Section 9.319 of the Uniform Commercial Code in effect
in the State of Texas, Section 84- 9-319 of the Uniform Commercial Code in
effect in the State of Kansas, Section 34.1-9.319 of the Uniform Commercial Code
in effect in the State of Wyoming, and any comparable provision of the law of
any other jurisdiction.

Security Agreement: the Security Agreement dated as of January 11, 1995
between the Borrower, the Parent and the Lender, in substantially the form
attached as Exhibit D to this Agreement, as the same from time to time may be
extended, amended, supplemented, waived or modified and in effect.

Settlement Date: means the twentieth (20th) day of each calendar month.

Special Concentration Limit: with respect to the Receivables owing from
any Obligor listed on Schedule 2 hereto (together with its Subsidiaries and
affiliates), the amount indicated opposite the name of such Obligor on Schedule
2 hereto; provided that notwithstanding any other term or provision contained
herein the Lender may, at any time in its sole discretion, reduce or increase
the Special Concentration Limit for any such Obligor, or add the name of any
other Obligor to the list of Obligors on such Schedule 2, through the delivery
by the Lender to the Borrower of an amended Schedule 2 hereto.

Standard Concentration Limit: with respect to all of the Receivables
owing from a single Obligor (except for an Obligor listed on Schedule 2 hereto)
or from a customer of a Project or Projects, together with Receivables owing
from its affiliates or Subsidiaries, an amount equal to $600,000; provided that
the Lender may, at any time in its sole discretion, reduce or increase the
Standard Concentration Limit for any Obligor through the delivery of a notice by
the Lender to the Borrower.

Structuring Fee: the fee described in Section 12.1(i) of this
Agreement.

Subsidiary: as to any Person, (i) a corporation of which shares of
stock having ordinary voting power (other than stock having such power only by
reason of the happening

19
<PAGE> 26

of a contingency) to elect a majority of the board of directors or other
managers of such corporation are at the time owned, or the management of which
is otherwise controlled, directly or indirectly, through one or more
intermediaries, or both, by such Person, (ii) a limited or general partnership
of which such Person or any of its subsidiaries is a general partner, or (iii) a
business trust in which such Person holds a majority interest comparable to that
for a corporation as described above.

Taxes: all taxes, levies, imposts, duties, or other charges of
whatsoever nature imposed by any government or any political subdivision or
taxing authority thereof, and any liability (including penalties and interest)
arising therefrom or with respect thereto, except for any taxes (other than
United States withholding taxes) on the overall net income of the Lender or any
similar tax in lieu of an overall net income tax on the Lender imposed by any
jurisdiction with respect to which the Lender is subject to such tax without
regard to the transactions contemplated by the Loan Documents.

Termination Event: (i) any Reportable Event with respect to a Plan, as
to which the requirements of Section 4043(a) of ERISA have not been waived by
the PBGC (provided that a failure to meet the minimum funding standard of
Section 302 of ERISA shall be a reportable event regardless of the issuance of
any waivers by the PBGC); (ii) the filing of a notice of intent to terminate any
Plan under Section 4041 of ERISA or any other event or condition which might
constitute grounds under Section 4042 of ERISA for the termination of, or for
the appointment of a trustee to administer, any Plan; (iii) the complete or
partial withdrawal of the Borrower or either Guarantor from a Multiemployer Plan
or the receipt by the Borrower or either Guarantor of notice from a
Multiemployer Plan that it is in reorganization or insolvency pursuant to
Section 4241 or 4245 of ERISA or that it intends to terminate or has terminated
under Section 4041A of ERISA; (iv) the institution of a proceeding by a
fiduciary of any Multiemployer Plan against the Borrower or either Guarantor to
enforce Section 515 of ERISA; or (v) any event or circumstance under which the
Borrower or either Guarantor may reasonably be expected to incur any liability
under Title IV of ERISA with respect to any Plan other than liabilities to make
contributions and pay premiums in the ordinary course.

<PAGE> 27
Total Credit Principal: the aggregate outstanding principal amount of
advances made under (i) that certain Bank One Credit Note dated September 29,
1994 made by KCS Resources, Inc. and KCS Pipeline Systems, Inc. in favor of Bank
One, Texas, National Association, in the original principal amount of
$50,000,000, and (ii) that certain CIBC Credit Note dated September 29, 1994
made by KCS Resources, Inc. and KCS Pipeline Systems, Inc. in favor of CIBC,
Inc., in the original principal amount of $50,000,000.

UCC 9.319 Receivable Limit: at any time, an amount equal to the lesser
of (i) $2,000,000 and (ii) 10% of the aggregate outstanding principal amount of
the Loans at such time.

UCC 9.319 Claims: at any time, with respect to Receivables, the
aggregate amount owing to interest owners entitled to the benefits of the lien
or security interest created in such Receivables by Section 9.319 or the Oil and
Gas Lien Act.

UCC 9.319 Receivable: any Receivable as to which the Lender does not
have a first priority perfected security interest under the Security Agreement,
free and clear of all other liens, security interests and encumbrances, because
of the rights created pursuant to Section 9.319 or the Oil and Gas Lien Act.

SECTION 2. THE LOANS

2.1 Loans. (a) Subject to the terms and conditions set forth in this
Agreement, the Lender hereby agrees that it will, from time to time prior to the
Credit Expiration Date, make Loans to the Borrower, subject to the immediately
succeeding sentence. Anything contained herein to the contrary notwithstanding,
the Lender shall not be obligated in any manner to make any Loan in a principal
amount which exceeds the positive result of (i) the lesser of (A) the Borrowing
Base and (B) the Loan Commitment, less (ii) the aggregate principal amount of
Loans outstanding on the proposed date of the making of such Loan. Not later
than 1:00 P.M., New York City time, on the date of the proposed borrowing, the
Lender shall make funds in respect of such Loan available to the Borrower at the
Lender's office in New York City or shall disburse such funds in Dollars to the
Borrower in accordance with the disbursement instructions set forth in the Loan
Request.

<PAGE> 28

(b) Each Loan Request, to be effective, shall include a computation
demonstrating compliance with the limits set forth in the second sentence of
paragraph (a) hereof. Each Loan shall be subject to the terms and provisions of
Sections 3 and 5 hereof.

2.2 Note. Each Loan made by the Lender shall be evidenced by, and
recorded on, the Note. The Borrower hereby authorizes the Lender to make the
appropriate notations on the schedule annexed to the Note for purposes of
recording any Loan made thereon and any payments or prepayments made with
respect thereto (provided that any failure by the Lender to make any such
notation shall not affect the obligations of the Borrower hereunder or under the
Note in respect of such Loan). The Borrower agrees that each notation made by
the Lender on the schedule annexed to the Note shall be final and conclusive
absent demonstrable error. The aggregate principal amount of the Loans
outstanding at any time shall constitute the principal amount owing on the Note
at such time. The principal of the Note, together with all accrued and unpaid
interest thereon, shall be payable on the Credit Expiration Date, subject to
Section 3.1 hereof and to acceleration as provided in this Agreement.

2.3 Loan Requests. (a) The Borrower shall deliver to the Lender a
written request, in substantially the form of Exhibit F to this Agreement (a
"Loan Request") (i) for a Eurodollar Loan, not later than 11:00 A.M., New York
City time, at least three Business Days prior to the date of the proposed
borrowing and (ii) for an Alternate Base Rate Loan, not later than 11:00 A.M.,
New York City time, on the day of the proposed borrowing. The Loan Request shall
specify (i) the date of the proposed borrowing (which shall be a Business Day),
(ii) the principal amount of the Loan to be made on that date (which, in
accordance with Section 3.4 hereof, shall be an integral multiple of $100,000
with a minimum of $1,000,000), (iii) whether such Loan is an Alternate Base Rate
Loan or a Eurodollar Loan and (iv) the disbursement instructions for the
proceeds of such Loan. Each Loan Request submitted by the Borrower shall be an
affirmation by the Borrower that (x) the representations and warranties of the
Borrower set forth in Section 6 of this Agreement are on the date of such Loan
Request, and will be on the date of the proposed borrowing, true and correct as
if made on and as of such dates, and (y) no Portfolio Event, Default or Event of
Default shall have occurred and be

<PAGE> 29

continuing on such dates. Any Loan Request given pursuant hereto shall be
irrevocable.

(b) If the Lender shall make a request therefor, each Loan Request
delivered to the Lender hereunder shall be accompanied by a Receivables Activity
Report dated of even date therewith, together with such other information
requested by the Lender.

2.4 The Loan Commitment. (a) The Borrower may from time to time reduce
the Loan Commitment by $1,000,000 or a multiple thereof upon two Business Days'
written notice to the Lender. Any such reduction shall be permanent and
irrevocable; provided that the amount of the Loan Commitment as so reduced shall
at no time be less than the aggregate principal amount of all outstanding Loans.

(b) Upon the occurrence of the Credit Expiration Date pursuant to
Section 4.1 hereof, the Loan Commitment shall be reduced to zero.

(c) After the effective date of any reduction pursuant to Section
2.4(a) hereof, the term "Loan Commitment" shall mean the Loan Commitment in
effect immediately prior to such reduction less the amount of such reduction of
the Loan Commitment.

2.5 Mandatory Payments. (a) If at any time the principal amount of
outstanding Loans shall exceed the lesser of (i) the Loan Commitment and (ii)
the Borrowing Base, then the Borrower shall immediately prepay the Loans in an
amount equal to such excess.

(b) If at any time the Lender shall notify the Borrower of the
occurrence of a Portfolio Event pursuant to Section 10.1, then, on each Business
Day thereafter, the Borrower shall pay to the Lender an amount equal to the
aggregate amount of all payments and other collections paid by Obligors or any
other Persons with respect to the Receivables and received by the Borrower on or
before the day immediately preceding such Business Day to the extent not
previously paid to the Lender. Such amounts paid by the Borrower to the Lender
shall be applied as a prepayment of the outstanding principal amount of the
Loans.

<PAGE> 30

SECTION 3. TERMS APPLICABLE TO LOANS

3.1 Payments and Prepayments. (a) Except to the extent otherwise
provided herein, all payments of principal, interest and other amounts to be
made by the Borrower hereunder and under the Note shall be made in Dollars, in
immediately available funds, to the Lender. Such payments shall be made no later
than 2:00 P.M., New York City time, on the date on which such payment shall
become due (each such payment made after such time on such due date to be deemed
to have been made on the next succeeding Business Day). The Borrower shall, at
the time of making each payment hereunder or under the Note, specify to the
Lender the Loans or other amounts payable by the Borrower hereunder to which
such payment is to be applied (and in the event that it fails to so specify, or
if a Portfolio Event or an Event of Default has occurred and is continuing, the
Lender may apply such payment to such type of Loan(s) or other amounts payable
hereunder as it may elect in its sole discretion, but subject to Section 3.1(f)
hereof). If the due date of any payment hereunder or under the Note would
otherwise fall on a day which is not a Business Day, such due date shall be
extended to the next succeeding Business Day and interest shall be payable for
any principal so extended for the period of such extension; provided, that, with
respect to Eurodollar Loans, if such next succeeding Business Day falls in the
next succeeding calendar month, such due date shall be the next preceding
Business Day.

(b) Borrower's Obligations Absolute. The Borrower's obligations to pay
the Lender hereunder and under the Note shall be absolute, unconditional and
irrevocable, and shall be paid strictly in accordance with the terms hereof and
thereof, under any and all circumstances and irrespective of any setoff,
counterclaim or defense to payment which the Borrower may have or have had
against the Lender.

(c) Optional Conversions. The Borrower may, at its option, (i) on the
last day of any Interest Period, convert a Eurodollar Loan into an Alternate
Base Rate Loan, (ii) on the last day of any Interest Period, continue a
Eurodollar Loan as a Eurodollar Loan, and (iii) on any Business Day, convert an
Alternate Base Rate Loan into a Eurodollar Loan; provided, that, except as
otherwise provided in this Agreement to the contrary, the Borrower shall deliver
to the Lender a Notice of Conversion or Continuation by 11:00 A.M., New York
City time, (A) in the

<PAGE> 31

case of clauses (ii) and (iii) above, not less than three Business Days' prior
to the date of each such conversion or continuation, and (B) in the case of
clause (i) above, on or prior to the date of such conversion. Each Notice of
Conversion or Continuation shall specify (x) the amount of each Loan to be
continued or converted, (y) the date of such continuation or conversion, and (z)
the type of Loan to be continued or converted (and in the case of a conversion,
the type of Loan to result from such conversion).

(d) Optional Prepayments. The Borrower may, at its option, without
penalty or premium, (i) on the last day of any Interest Period, prepay all or
any portion of the principal of the Eurodollar Loans, and (ii) on any Business
Day, prepay all or any portion of the principal of the Alternate Base Rate
Loans; provided, in each case, that any such prepayment, if a partial
prepayment, shall be an integral multiple of $100,000 with a minimum amount of
$1,000,000. The Borrower shall deliver to the Lender notice of such prepayment
by 11:00 A.M., New York City time on such prepayment date, specifying the amount
of each Loan to be prepaid on such date.

(e) Payment of Interest. (i) The Borrower hereby promises to pay to the
Lender on each Settlement Date interest on the unpaid principal amount of each
Loan for the period commencing on the date of such Loan until but not including
the stated maturity thereof (whether by acceleration or otherwise) or the date
of prepayment thereof (a) during the periods such Loan is an Alternate Base Rate
Loan, at the Alternate Base Rate and (b) during the periods such Loan is a
Eurodollar Loan, at the Eurodollar Rate, plus 1.375%; provided, however, that
after the occurrence and during the continuance of an Event of Default, all
outstanding Loans shall bear interest at the Post-Default Rate.

(ii) Notwithstanding the foregoing, the Borrower hereby promises to pay
interest on any Loan or any installment thereof and (to the extent that the
payment of such interest shall be legally enforceable) on any overdue
installment of interest, and on any other amount payable by the Borrower
hereunder which shall not be paid in full when due (whether at stated maturity,
by acceleration or

<PAGE> 32

otherwise), for the period commencing on the due date thereof until but not
including the date the same is paid in full at the Post-Default Rate.

(iii) Except as provided in the next sentence, accrued interest on each
Loan shall be payable on each Settlement Date. Interest payable at the
Post-Default Rate shall be payable from time to time on demand of the Lender.

(f) Application of Prepayments. If the amount of any payment or
prepayment received by the Lender in respect of a Loan is less than the
principal of and interest accrued on such Loan and required to be paid on the
date of payment or prepayment, the amount paid or prepaid on such Loan shall be
applied by the Lender first to accrued interest and then to principal.

(g) Net Payments. (i) All payments made by the Borrower under this
Agreement or any other Loan Document shall be made free and clear of, and
without reduction or withholding for or on account of, any present or future
Taxes now or hereafter imposed, levied, collected, withheld or assessed by any
Governmental Authority, and all liabilities related thereto. If any Taxes are
required to be withheld or deducted from any amounts payable to the Lender under
this Agreement or any other Loan Document, the Borrower shall pay the relevant
amount of such Taxes and the amounts so payable to the Lender shall be increased
to the extent necessary to yield to the Lender (after payment of all Taxes)
interest or any such other amounts payable hereunder at the rates or in the
amounts specified in this Agreement and the other Loan Documents. Whenever any
Taxes are paid by the Borrower with respect to payments made in connection with
this Agreement or any other Loan Document, as promptly as possible thereafter,
the Borrower shall send to the Lender a certified copy of an original official
receipt received by the Borrower showing payment thereof.

(ii) The Borrower hereby agrees to indemnify the Lender for the full
amount of all Taxes attributable to payments by or on behalf of the Borrower
hereunder or under any other Loan Document, any Taxes paid by the Lender, as the
case may be, and any present or future claims, liabilities or losses with
respect to or resulting from any omission to pay or delay in paying such Taxes
(including, without limitation, any incremental Taxes, interest or penalties
that may become payable by the Lender as a result of any failure to pay such
Taxes), whether or not such Taxes

<PAGE> 33

were correctly or legally asserted. Such indemnification shall be made within
five (5) days from the date the Lender makes written demand therefor.

3.2 Maximum Interest. Anything in this Agreement or the Note to the
contrary notwithstanding, the interest rate on any Loan shall in no event be in
excess of the maximum permitted by Applicable Law.

3.3 Computations. (a) Interest on all Loans shall be computed on the
basis of the actual number of days elapsed in the period during which interest
accrues and a year of 365/366 days, in the case of Alternate Base Rate Loans,
and a year of 360 days, in the case of Eurodollar Loans. In computing interest
on any Loan, the date of the making of the Loan or the first day of an Interest
Period, as the case may be, shall be included and the date of payment or the
expiration date of an Interest Period, as the case may be, shall be excluded;
provided, that if a Loan is repaid on the same day on which it is made, one
day's interest shall be paid on such Loan.

(b) All computations made by the Lender under this Agreement shall be
conclusive absent demonstrable error.

3.4 Minimum Amounts. Except for conversions or prepayments made
pursuant to Sections 2.5 and 5.4 hereof, each borrowing, conversion and
prepayment of principal of Loans shall be an integral multiple of $100,000 with
a minimum amount of $1,000,000 (borrowings, prepayments or conversions of or
into Loans of different types at the same time hereunder are to be deemed
separate borrowings, conversions and prepayments for purposes of the foregoing,
one for each type).

SECTION 4. TERMINATION

4.1 Credit Expiration Date. As used herein, "Credit Expiration Date"
shall mean the earlier of (i) the Commitment Expiration Date, and (ii) such date
as shall be determined pursuant to Section 11.1 hereof.

4.2 Termination by the Borrower. The Borrower may terminate this
Agreement and the Loan Commitment upon not less than fifteen days' prior written
notice to the Lender and upon payment of all amounts owing to the Lender
hereunder and under the Note.

<PAGE> 34

SECTION 5. YIELD PROTECTION AND ILLEGALITY

5.1 Additional Costs. (a) The Borrower shall pay directly to the Lender
from time to time immediately upon demand such amounts as the Lender may
determine to be necessary to compensate it (or any Booking Office) for any costs
incurred by the Lender (or any Booking Office) or any reduction of the rate of
return on assets or equity of the Lender (or any Booking Office) to a level
below that which the Lender (or any Booking Office) could have achieved, which
it determines are attributable to its making or maintaining of any Loans
hereunder or its obligation to make or maintain any Loans hereunder, or any
reduction in any amount receivable by the Lender (or any Booking Office)
hereunder in respect of any Loans or such obligation (such increases in costs
and reductions in amounts receivable or rate of return being herein called
"Additional Costs"), resulting from any Regulatory Change which (i) changes the
basis of taxation of any amounts payable to the Lender under this Agreement or
any Note payable to it (other than taxes imposed on the overall net income of
the Lender unless such tax is imposed solely as a result of the transactions
contemplated by the Loan Documents); (ii) imposes or modifies any reserve,
special deposit, capital adequacy, capital maintenance or similar requirements,
or results in any change in the interpretation or administration thereof by any
governmental authority, central bank or comparable agency charged with the
interpretation or administration thereof, or the compliance by the Lender (or
any Booking Office) or the Lender's holding company with any request or
directive regarding capital adequacy or capital maintenance (whether or not
having the force of law) or with any such authority, central bank or comparable
agency; or (iii) imposes any other condition affecting the Lender's return under
this Agreement (or any of such extensions of credit or liabilities). The Lender
will notify the Borrower of any event which will entitle the Lender to
compensation pursuant to this Section 5.1(a) as promptly as practicable after it
obtains knowledge thereof and determines to request such compensation; provided,
that the failure of the Lender to so notify the Borrower shall not affect the
obligations of the Borrower hereunder in respect of such Additional Costs. The
Lender will furnish the Borrower with a certificate setting forth the basis and
amount of each request by the Lender for compensation under this Section 5.1(a).

<PAGE> 35

(b) Without limiting the effect of the foregoing provisions of this
Section 5.1, in the event that, by reason of any Regulatory Change, the Lender
either (i) incurs Additional Costs based on or measured by the excess above a
specified level of the amount of a category of deposits or other liabilities of
the Lender which includes deposits by reference to which the interest rate on
Eurodollar Loans is determined as provided in this Agreement or a category of
extensions of credit or other assets of the Lender which includes Eurodollar
Loans or (ii) becomes subject to restrictions on the amount of such a category
of liabilities or assets which it may hold, then, if the Lender so elects by
notice to the Borrower, the obligation of the Lender to make, and to convert
Alternate Base Rate Loans into, Eurodollar Loans hereunder shall be suspended
until the date such Regulatory Change ceases to be in effect (and all Eurodollar
Loans held by the Lender then outstanding shall be converted into Alternate Base
Rate Loans in accordance with Section 5.4 hereof).

(c) Determinations by the Lender for purposes of this Section 5.1 of
the effect of any Regulatory Change on its costs of making or maintaining the
Loans, the Loan Commitment or on amounts receivable by it hereunder or under the
Note, and of the additional amounts required to compensate the Lender in respect
of any Additional Costs, shall be conclusive absent demonstrable error.

5.2 Limitation on Types of Loans. Anything herein to the contrary
notwithstanding, if, on or prior to the determination of any interest rate for
any Eurodollar Loan for any Interest Period therefor:

(a) the Lender determines in good faith (which determination shall
be conclusive) that the rate of interest which appears on the Telerate
Page or the quotations of interest rates for the relevant deposit
referred to in the definition of the Eurodollar Rate in Section 1
hereof are not being provided in the relevant amounts or for the
relevant maturities for purposes of determining the rate of interest
for such Eurodollar Loan as provided in this Agreement; or

(b) the Lender determines in good faith (which determination shall
be conclusive) that the relevant rates of interest referred to in the
definition of the Eurodollar Rate in Section 1

<PAGE> 36

hereof upon the basis of which the rate of interest for such Eurodollar
Loan for such Interest Period is to be determined do not accurately
reflect the cost to the Lender of making or maintaining such Eurodollar
Loan for such Interest Period;

then the Lender shall give the Borrower prompt notice thereof, and so long as
such condition remains in effect, the Lender shall be under no obligation to
make Eurodollar Loans or to convert Alternate Base Rate Loans into Eurodollar
Loans and the Borrower shall, on the last day(s) of the then current Interest
Period(s) for the outstanding Eurodollar Loans, either prepay such Eurodollar
Loans or convert such Eurodollar Loans into Alternate Base Rate Loans in
accordance with Section 5.4 hereof.

5.3 Illegality. Notwithstanding any other provision in this Agreement,
in the event that it becomes unlawful for the Lender or its Booking Office to
(a) honor its obligation to make Eurodollar Loans hereunder, or (b) maintain
Eurodollar Loans hereunder, then the Lender shall promptly notify the Borrower
thereof, and the Lender's obligation to make Eurodollar Loans and to convert
Alternate Base Rate Loans into Eurodollar Loans hereunder shall be suspended
until such time as the Lender may again make and maintain Eurodollar Loans, and
the Lender's outstanding Eurodollar Loans shall be converted into Alternate Base
Rate Loans in accordance with Section 5.4 hereof.

5.4 Certain Conversions Pursuant to Sections 5.1, 5.2 and 5.3. If a
Eurodollar Loan (such Eurodollar Loan being herein called "Affected Loan") is to
be converted pursuant to Sections 5.1, 5.2 or 5.3 hereof, such Affected Loan
shall be automatically converted into an Alternate Base Rate Loan on the last
day(s) of the then current Interest Period for the Affected Loan (or, in the
case of a conversion required by Section 5.3 hereof, on such earlier date as the
Lender may specify to the Borrower) and, unless and until the Lender gives
notice that the circumstances specified in Sections 5.1, 5.2 or 5.3 hereof which
gave rise to such conversion no longer exist, to the extent that the Affected
Loan has been so converted, all payments and prepayments of principal which
would otherwise be applied to the Affected Loans shall be applied instead to its
Alternate Base Rate Loans.

5.5 Compensation. The Borrower shall pay to the Lender, upon the
request of the Lender, such amount or

30
<PAGE> 37

amounts as shall be sufficient (in the opinion of the Lender) to compensate it
for any loss, cost or expense incurred by it as a result of:

(a) any payment, prepayment or conversion of a Eurodollar Loan
made by the Lender on a date other than the last day of an Interest
Period for such Eurodollar Loan; or

(b) any failure by the Borrower to borrow, convert or prepay a
Eurodollar Loan held by the Lender on the date for such borrowing,
conversion or prepayment specified in the relevant Loan Request, Notice
of Conversion or Continuation or notice of prepayment delivered under
Section 3.1(d) hereof, respectively;

such compensation to include, without limitation, an amount equal to the excess,
if any, of (i) the amount of interest which would have accrued on the principal
amount so paid, prepaid or converted or not borrowed for the period from the
date of such payment, prepayment or conversion or failure to borrow to the last
day of the then current Interest Period for such Eurodollar Loan (or, in the
case of a failure to borrow, the Interest Period for such Eurodollar Loan which
would have commenced on the date of such failure to borrow) at the applicable
rate of interest for such Eurodollar Loan provided for herein over (ii) the
interest component (as reasonably determined by the Lender) of the amount (as
reasonably determined by the Lender) the Lender would have bid in the
Eurocurrency market for Dollar deposits of amounts comparable to such principal
amount and maturities comparable to such period.

SECTION 6. REPRESENTATIONS AND WARRANTIES

The Borrower (with respect to itself), Proliq (with respect to itself
and the Borrower) and the Parent (with respect to itself, Proliq and the
Borrower) represent and warrant to the Lender on the date hereof and on each
borrowing of a Loan that:

6.1 Organization, Powers, etc. (a) Each of the Borrower and each of the
Guarantors is a corporation duly incorporated, validly existing and in good
standing under the laws of its jurisdiction of organization and is duly
qualified to do business as a foreign corporation in each other jurisdiction in
which the conduct of its business

<PAGE> 38

requires such qualification. Each of the Borrower and each of the Guarantors has
all requisite corporate power and authority to conduct its business as
contemplated to be conducted, to own its properties and to execute, deliver, and
perform all of its obligations under this Agreement and the other Loan Documents
to which it is a party.

6.2 Corporate Authority, etc. The execution, delivery and performance
by each of the Borrower and each of the Guarantors of this Agreement and the
other Loan Documents to which it is a party have been duly authorized by all
necessary action (corporate or otherwise), on its part and do not and will not
(i) violate any provision of any law, rule, regulation, order, writ, judgment,
injunction, decree, determination or award to which it is subject or of its
certificate of incorporation or by-laws, (ii) result in a breach of or
constitute a default under any indenture or loan or credit agreement or any
other agreement, lease or instrument to which it is a party or by which it or
any of its properties are bound, or (iii) result in, or require, the creation or
imposition of any mortgage, deed of trust, assignment, pledge, Lien, security
interest or other charge or encumbrance of any nature upon or with respect to
any of its properties except as otherwise provided by this Agreement, the Pledge
Agreement and the Security Agreement; nor is it in default under any such law,
rule, regulation, order, writ, judgment, injunction, decree, determination or
award to which it is subject or any such indenture, agreement, lease or
instrument.

6.3 Government Approvals. No authorization, consent, approval, license,
exemption of or filing or registration with any commission, board, bureau,
agency or instrumentality, is or will be necessary to the valid execution,
delivery or performance by the Borrower or either Guarantor of this Agreement
and the other Loan Documents to which it is a party.

6.4 Government Regulation. Neither the Borrower nor either Guarantor
nor any Subsidiary of any of them is subject to regulation under the Investment
Company Act of 1940, as amended, or any other federal or state statute or
regulation which limits the ability of the Borrower, either Guarantor or any
such Subsidiary to incur indebtedness or the ability of the Borrower, either
Guarantor or any such Subsidiary to consummate the transactions contemplated by
this Agreement and the other Loan Documents to which it is a party.

<PAGE> 39

6.5 Valid and Binding Obligations. This Agreement and the other Loan
Documents to which any of the Borrower or either Guarantor is a party are the
legal, valid and binding obligations of each of the Borrower and such Guarantor,
as the case may be, enforceable against the Borrower and such Guarantor, as the
case may be, in accordance with their terms.

6.6 Litigation. Other than as set forth on Schedule 6.6 hereto, there
are no actions, suits or proceedings pending or, to the knowledge of the
Borrower or either Guarantor, threatened against or affecting the Borrower,
either Guarantor or any Subsidiary of any of them, the business or any property
of any of them, or involving the legality, validity or enforceability of the
Loan Documents at law or in equity before any court, governmental agency or
regulatory authority (federal, state or local), which, if adversely determined,
could have a material adverse effect on the business, operations, property or
financial or other condition of the Borrower or either Guarantor.

6.7 Use of Proceeds. No part of the proceeds of any Loan will be used
to purchase or carry any "margin stock" (as defined in Federal Reserve
Regulation U) or to extend credit to others for such purpose. The Borrower does
not engage in, nor have as one of its important activities, the business of
extending credit for the purpose of purchasing or carrying any margin stock.

6.8 Accuracy of Information. All information, financial or otherwise,
written or verbal, furnished or to be furnished at any time by the Borrower or
either Guarantor to the Lender is or will be true, complete and accurate in all
material respects as of its date, and does not or will not contain any untrue
statement of a material fact or omit to state a material fact as of such date.

6.9 Accuracy of Representations and Warranties. The representations and
warranties of each of the Borrower and each Guarantor contained in each Loan
Document to which it is a party are or will be true and correct.

6.10 Financial Position. (a) The consolidated balance sheets of the
Parent and its consolidated Subsidiaries as at September 30, 1994 and the
related statements of income and shareholders' equity of the Parent

<PAGE> 40

and its consolidated Subsidiaries for the fiscal year then ended, audited by its
independent accountants, copies of which have been furnished to the Lender,
present the consolidated financial position of the Parent and its consolidated
Subsidiaries as at such date and the consolidated results of the operations of
the Parent and its consolidated Subsidiaries for the period ended on such date,
all in accordance with GAAP; and

(b) The unaudited balance sheet of the Borrower at September 30,
1994 and the related unaudited statement of income of the Borrower for the
fiscal year then ended, copies of which have been furnished to the Lender,
present the financial position of the Borrower as at such date and the results
of the operations of the Borrower for the period ended on such date, all in
accordance with GAAP; and.

6.11 Pledge of Collateral. The Lender, pursuant to the Security
Agreement, holds a valid, perfected and first priority security interest in the
Assigned Collateral covered thereby.

6.12 Title to Assigned Collateral. The Borrower has legal title to all
of the Assigned Collateral owned by it on the date hereof, and will have legal
title to all assets acquired by it and included in the Assigned Collateral at
any time subsequent to the date hereof, free and clear of all Liens, except as
contemplated by the Security Agreement.

6.13 Tax Returns. Except for taxes being contested in good faith by
appropriate proceedings diligently pursued and for which adequate reserves have
been established, each of the Borrower and each Guarantor (i) has filed all
federal tax returns and state tax returns for the state in which it is
incorporated and the state in which it has its principal place of business, and
all other state and local tax returns required to be filed by it, and (ii) has
not failed to pay any taxes, or interest and penalties relating thereto, on or
before the due dates thereof. Except to the extent that reserves therefor are
reflected in the financial statements delivered pursuant to Section 6.10 hereof,
(a) there are no federal, state or local tax liabilities of the Borrower or
either Guarantor due or to become due for any tax year ended on or prior to the
date of execution of this Agreement relating to the Borrower or either
Guarantor, whether incurred in respect of or measured

<PAGE> 41

by the income of the Borrower or either Guarantor, which are required to be
reflected in accordance with GAAP in the financial statements delivered pursuant
to Section 6.10 and have not been so reflected, and (b) there are no claims
pending, proposed or, to the best of the Borrower's and each Guarantor's
knowledge, threatened against the Borrower or either Guarantor for past federal,
state or local taxes, except those, if any, as to which proper reserves in
accordance with GAAP are reflected in such financial statements.

6.14 ERISA. Each Plan is in compliance with all of the applicable
provisions of ERISA, and each Plan intended to be qualified under Section 401(a)
of the Code is so qualified. No Plan has incurred an "accumulated funding
deficiency" (within the meaning of Section 302 of ERISA or Section 412 of the
Code) whether or not waived. Neither the Borrower nor any ERISA Affiliate (i)
has incurred or expects to incur any liability under Title IV of ERISA with
respect to any Plan which could give rise to a Lien in favor of the PBGC, other
than liability for the payment of premiums, all of which have been timely paid
when due in accordance with Section 4007 of ERISA, (ii) has incurred or expects
to incur any withdrawal liability, within the meaning of Section 4201 of ERISA,
(iii) is subject to any Lien under Section 412(n) of the Code or Sections 302(f)
or 4068 of ERISA or arising out of any action brought under Sections 4070 or
4301 of ERISA, or (iv) is required to provide security to a Plan under Section
401(a)(29) of the Code. The PBGC has not instituted proceedings to terminate any
Plan or to appoint a trustee or administrator of any such Plan and no
circumstances exist that constitute grounds under Section 4042 of ERISA to
commence any such proceedings.

6.15 No Material Adverse Change. Since November 30, 1994, there has
occurred no event which has or had, or could have, a material adverse effect
upon the business, properties, liabilities, condition (financial or otherwise),
results of operations or prospects of the Borrower or either Guarantor, or upon
the ability of the Borrower or either Guarantor to perform its respective
obligations under this Agreement or the other Loan Documents to which it is a
party or upon the ability of the Lender to enforce this Agreement or the other
Loan Documents.

6.16 Compliance with Laws. (a) Each of the Borrower and each
Guarantor is in compliance in all material respects with all Applicable Laws;
and

35
<PAGE> 42

(b) Each Subsidiary of the Borrower and each Subsidiary of a Guarantor
is in compliance in all material respects with all Applicable Laws except where
the failure to so comply would not have a material adverse effect on the
Borrower or such Guarantor.

6.17 Chief Place of Business. The chief place of business and chief
executive office of the Borrower and the office where the Borrower keeps its
records concerning the Receivables are located at 1800 West Loop South, 14th
Floor, Houston, Texas 77027.

6.18 Lock-Box Banks; Lock-Box Accounts. The names and addresses of the
Lock-Box Banks, together with the account numbers of the Lock-Boxes, are
specified in Schedule 3 (or as shall have been notified to the Lender pursuant
to the Security Agreement).

6.19 Franchises, Licenses, Trademarks and other Rights. Each of the
Borrower, each Guarantor and each of their respective Subsidiaries have all
franchises, permits, licenses and other authority as are necessary to enable
them to conduct their respective businesses as currently being conducted and as
proposed to be conducted, and none of them is in default under any of such
franchises, permits, licenses or other authority. To the best of the Borrower's
and each Guarantor's knowledge, each of the Borrower, each Guarantor and each of
their respective Subsidiaries possesses all patents, patent rights, trademarks,
trademark rights, trade names, trade name rights, copyrights and other
intellectual property rights necessary to conduct their respective businesses as
currently being conducted and as proposed to be conducted, without, to the best
of the Borrower's and each Guarantor's knowledge, conflict with any valid rights
of others.

6.20 No Default. Each of the Borrower and each Guarantor is in
compliance with all of the terms and provisions contained herein and in the
other Loan Documents to which it is a party and no Portfolio Event or Default
has occurred and is continuing.

6.21 Capital Stock. (a) The Parent owns, beneficially and of record,
100% of the issued and outstanding Capital Stock of Proliq.

36
<PAGE> 43

(b) Proliq owns, beneficially and of record, 100% of the issued and
outstanding Capital Stock of the Borrower.

(c) As of the date hereof, the only Capital Stock of the Borrower which
has been issued are ten (10) shares designated as common stock.

(d) No Person has the right to require Proliq (other than the Parent)
or the Borrower (other than Proliq) to issue to such Person or any other Person
any Capital Stock, other equity securities or any other ownership interest in
(including, without limitation, stock or securities exchangeable for or
convertible into Capital Stock, other equity securities or ownership interests)
Proliq or the Borrower.

6.22 Trade Names, etc. Except as set forth on Schedule 6.22 to this
Agreement, the Borrower (a) does not conduct or transact, nor has it ever
conducted or transacted, business in any jurisdiction under any assumed name,
fictitious name, trade name, alternate corporate name or other like name (each a
"Trade Name"), and (b) has not made any filing or application with or otherwise
sought the approval of any Governmental Authority with respect to the use by the
Borrower of a Trade Name in any jurisdiction. The Borrower has not at any time
(i) incurred any Indebtedness under any Trade Name, (ii) granted any security
interest or permitted or suffered any Lien to exist against the Borrower or any
portion of its assets or property, whether real or personal (including, without
limitation, any of the Assigned Collateral) under any Trade Name, (iii) executed
or filed any financing statement as a debtor under the Uniform Commercial Code
as in effect in any jurisdiction under any Trade Name, except pursuant to this
Agreement or the Security Agreement, or (iv) had any judgment entered or
rendered against it under any Trade Name.

SECTION 7. CONDITIONS PRECEDENT

Each borrowing of a Loan pursuant to this Agreement may be made only if
the following conditions precedent are met and each request for a Loan shall
constitute a representation and warranty that such conditions precedent have
been met:

7.1 No Default. Except as otherwise consented to by the Lender in
writing, on the date of each borrowing, no

37
<PAGE> 44
Portfolio Event, Default or Event of Default shall have occurred and be
continuing on such date.

7.2 Opinions of Counsel. On the date of the initial borrowing, the
Lender shall have received:

(a) the favorable written opinion of Orloff, Lowenbach, Stifelman &
Siegel, P.A., counsel to the Borrower and the Guarantors, addressed to and
satisfactory in form, scope and substance to the Lender; and

(b) such other opinions as may be reasonably requested by the Lender or
counsel for the Lender.

7.3 Other Supporting Documents. On or prior to the date of the
initial borrowing, the Borrower shall deliver, or cause to be delivered, to the
Lender:

(a) this Agreement, executed by each of the parties hereto, together
with all schedules hereto;

(b) an executed Pledge Agreement, together with its receipt of the
Capital Stock pledged pursuant thereto;

(d) good standing certificates as of dates no more than twenty days
prior to the date of such initial borrowing, with respect to each of the
Borrower and each Guarantor, from the Secretary of State of the State of its
incorporation and from the Secretary of State of each state in which each of
the Borrower or each Guarantor is qualified to do business;

(e) a certificate of the Secretary or an Assistant Secretary and
President or Chief Financial Officer of the Borrower substantially in the
form attached hereto as Exhibit B;

(f) a certificate of the Secretary or an Assistant Secretary and
President or Chief Financial Officer of each the Guarantor substantially in
the form attached hereto as Exhibit B;

(g) evidence of such filings of financing statements and assignments
or notices of assignments in

38
<PAGE> 45
such jurisdictions as the Lender may deem necessary or appropriate in order
to perfect the Lender's first priority security interest in the Assigned
Collateral;

(h) an executed Security Agreement;

(i) a copy of the annual unaudited financial statements of the
Borrower and its respective Subsidiaries for the fiscal year ended
September 30, 1994, including therein the consolidated balance sheet of the
Borrower and such Subsidiaries as at the end of such year and the related
consolidated statements of income and cash flows of the Borrower and such
Subsidiaries for such year, certified by a responsible officer as fairly
presenting the financial position and the results of operations of the
Borrower and such Subsidiaries as at and for such year and as having been
prepared in accordance with GAAP;

(j) a copy of the annual audited report for the Parent and its
Subsidiaries for the fiscal year ended September 30, 1994, including therein
the consolidated balance sheet of each of the Parent and such Subsidiaries
as at the end of such year and the related consolidated statements of income
and cash flows of the Parent and such Subsidiaries for such year, certified
by its independent accountants as fairly presenting the financial position
and the results of operations of the Parent and such Subsidiaries as at and
for such year and as having been prepared in accordance with GAAP;

(k) original Lock-Box agreements executed by each of the parties
thereto;

(l) on the date of the initial borrowing, a Receivables Activity
Report covering the calendar month ending November 30, 1994; and

(m) such other documents as the Lender, or counsel for the Lender, may
reasonably request.

7.4 Control of Proliq and the Borrower. The Parent shall own 100% of
the then outstanding Capital Stock of Proliq, and Proliq shall own 100% of the
then outstanding Capital Stock of the Borrower.

<PAGE> 46

7.5 Loan Request. The Borrower shall have delivered to the Lender a
Loan Request complying with the provisions of Section 2.3.

7.6 Fees Paid. There shall have been paid to the Lender the Commitment
Fee, the Structuring Fee and the other fees due and payable on the date or
through the date of such borrowing.

7.7 Representations and Warranties. The representations and warranties
of the Borrower and each Guarantor shall be true and correct in all respects and
each Guarantor shall have delivered to the Lender a certificate of a duly
authorized officer of each Guarantor substantially in the form of Exhibit C
hereto certifying that (i) the representations and warranties of each of the
Borrower and each Guarantor set forth in Section 6 are true and correct, (ii) no
Portfolio Event, Default or Event of Default has occurred and is continuing or
shall have occurred and be continuing, and (iii) after giving effect to the
making of all Loans to be made on such borrowing date, the aggregate principal
amount of all outstanding Loans will not exceed the lesser of (A) the Borrowing
Base and (B) the Loan Commitment.

SECTION 8. AFFIRMATIVE COVENANTS

Each of the Borrower (with respect to itself), Proliq (with respect to
itself and the Borrower) and the Parent (with respect to itself, Proliq and the
Borrower) covenants and agrees with the Lender that from and after the Effective
Date and so long as this Agreement shall remain in effect or any Loans or any
other amounts owing under this Agreement shall be unpaid, unless the Lender
shall otherwise consent in writing, it will:

8.1 Payment of Taxes, etc. Pay and discharge all taxes imposed upon it
or upon its income or profits, prior to the date on which penalties attach
thereto, and all lawful claims, which, if unpaid, might become a Lien or charge
upon any of its assets; provided, however, that neither the Borrower nor either
Guarantor shall be required to pay or discharge any taxes which are being
contested in good faith by appropriate proceedings diligently pursued and for
which adequate reserves have been established.

8.2 Preservation of Corporate Existence. Continue to engage in
business of the same general type as now

<PAGE> 47
conducted and preserve and maintain its existence in the jurisdiction of its
incorporation, and its rights, franchises and privileges material to the conduct
of its business as now being conducted, and qualify and remain qualified as a
foreign corporation or entity in each jurisdiction in which such qualification
is necessary in view of its business operations or the ownership of its
properties.

8.3 Compliance with Laws, etc. Comply with the requirements of all
Applicable Laws of any Governmental Authority.

8.4 Inspection Rights. At any time and from time to time during normal
business hours permit the Lender or any agents or representatives thereof, upon
at least 24 hours notice from, and at the expense of, the Lender, to examine and
make copies of the records and books of account related to the transactions
contemplated by the Loan Documents and to visit its properties, and to discuss
its affairs, finances and accounts with any of its authorized agents or
officers.

8.5 Maintenance of Approvals, Filings and Registrations. At all times
maintain in effect, renew and comply with all the terms and conditions of all
consents, licenses, approvals and authorizations as may be necessary or
appropriate under any Applicable Law or regulation (i) for the execution,
delivery and performance of the Loan Documents, (ii) to make the Loan Documents
legal, valid, binding and enforceable against the Borrower and the Guarantors
and (iii) to conduct its business.

8.6 Reporting Requirements. Furnish or cause to be furnished to the
Lender:

(a) (1) As soon as available, but, in any event not later than ninety
(90) days after the end of each fiscal year of the Parent, a copy of the
annual audited consolidated reports for the Parent and its Subsidiaries for
such year, including therein the consolidated balance sheets of the Parent
and its Subsidiaries as at the end of such year and the related consolidated
statements of income and cash flows of the Parent and its Subsidiaries for
such year, or statements providing substantially similar information, in
each case certified without qualification by an independent public
accountant of recognized national standing as fairly

<PAGE> 48
representing the financial position and results of operation of the Parent
and its Subsidiaries as at and for the year ending on its date and having
been prepared in accordance with GAAP; and

(2) As soon as available, but, in any event not later than ninety
(90) days after the end of each fiscal year of the Borrower, the unaudited
balance sheet of the Borrower as at the end of such year and the related
unaudited statement of income and cash flows of the Borrower for such year,
or statements providing substantially similar information, certified by a
responsible officer of the Borrower as fairly presenting the financial
position and the results of operations of the Borrower as at and for the
year ending on its date and as having been prepared in accordance with GAAP.

(b) (1) As soon as available, but in any event not later than
forty-five (45) days after the end of each of the first three quarterly
periods of each fiscal year of the Parent, the unaudited consolidated
balance sheets of the Parent and its Subsidiaries as at the end of each such
quarter and the related unaudited consolidated statements of income and cash
flows of the Parent and its Subsidiaries for such quarter and the portion of
the fiscal year through such date, certified by a responsible officer of the
Parent as fairly presenting the financial position and the results of
operations of the Parent and its Subsidiaries in all material respects as at
and for the quarter ending on its date and as having been prepared in
accordance with GAAP (subject to normal year-end audit adjustments); and

(2) As soon as available, but in any event not later than
forty-five (45) days after the end of each of the first three quarterly
periods of each fiscal year of the Borrower, the unaudited balance sheet of
the Borrower as at the end of each such quarter and the related unaudited
statement of income and cash flows of the Borrower for such quarter and the
portion of the fiscal year through such date, certified by a responsible
officer of the Borrower as fairly presenting the financial position and the
results of operations of the Borrower as at and for the quarter ending on
its date and as having been prepared in accordance with GAAP (subject to
normal year-end audit adjustments).

<PAGE> 49

(c) Concurrently with the delivery of the financial statements referred
to in Sections 8.6(a) and (b) above, a certificate of (i) a duly authorized
officer of the Borrower stating that such officer has reviewed the terms of
this Agreement and the other Loan Documents to which the Borrower is a party
and has made, or caused to be made under his supervision, a review in
reasonable detail of the transactions and condition of the Borrower during
the accounting period covered by such financial statements and that such
review has not disclosed the existence during or at the end of such
accounting period, and that such officer does not have knowledge of the
existence as at the date of such certificate, of any Portfolio Event,
Default or Event of Default except as specified in such certificate and (ii)
a duly authorized officer of the Parent (A) stating that such officer has
reviewed the terms of this Agreement and the other Loan Documents to which
the Parent is a party and has made, or caused to be made under his
supervision, a review in reasonable detail of the transactions and condition
of the Parent and its Subsidiaries during the accounting period covered by
such financial statements and that such review has not disclosed the
existence during or at the end of such accounting period, and that such
officer does not have knowledge of the existence as at the date of such
certificate, of any Portfolio Event, Default or Event of Default except as
specified in such certificate and (B) containing the computation of, and
showing compliance with, each of Sections 9.2, and 9.6.

(d) Promptly and in any event within five (5) Business Days after the
Borrower, either Guarantor or any ERISA Affiliate knows or has reason to
know that a Reportable Event has occurred with respect to any Plan, a
statement of the chief financial officer of the Borrower or either
Guarantor, as the case may be, setting forth details as to such reportable
event and the action that the Borrower, either Guarantor or such ERISA
Affiliate proposes to take with respect thereto, together with a copy of the
notice of such Reportable Event, if any, given to the PBGC, the Internal
Revenue Service or the Department of Labor; (ii) promptly and in any event
within ten (10) Business Days after receipt thereof, a copy of any notice
the Borrower, either Guarantor or any ERISA Affiliate may receive from the
PBGC relating to the intention of the PBGC to terminate any Plan or to
appoint a trustee to administer any such

<PAGE> 50

Plan; (iii) promptly and in any event within ten (10) Business Days after a
filing with the PBGC pursuant to Section 412(n) of the Code of a notice of
failure to make a required installment or other payment with respect to a
Plan, a statement of the chief financial officer of the Borrower or either
Guarantor, as the case may be, setting forth details as to such failure and
the action that the Borrower, either Guarantor or an ERISA Affiliate
proposes to take with respect thereto, together with a copy of such notice
given to the PBGC; and (iv) promptly and in any event within ten (10)
Business Days after receipt thereof by the Borrower, either Guarantor or any
ERISA Affiliate from the sponsor of a Multiemployer Plan, a copy of each
notice received by the Borrower or any ERISA Affiliate concerning the
imposition of withdrawal liability or a determination that a Multiemployer
Plan is, or is expected to be, terminated or reorganized.

(e) Promptly and in any event within five (5) Business Days after the
same are publicly available, copies of all regular and periodic financial
information, proxy materials and other information and reports, if any,
which either Guarantor, the Borrower or any of their respective Subsidiaries
shall file with the Securities and Exchange Commission or any securities
exchange.

(f) Promptly after the end of each calendar month, but not later than
the next succeeding Settlement Date, and at such other times as the Lender
may require, a Receivables Activity Report prepared by the Borrower as of
the last day of such month, or at such time as the Lender may require, as
the case may be.

(g) Within five Business Days after the fifteenth (15th) day of each
calendar month and at such other times as the Lender may require, a
Mid-Month Report prepared by the Borrower as of such fifteenth (15th) day of
such calendar month, or at such time as the Lender may require, as the case
may be.

(h) Such other information respecting the Receivables as the Lender may
from time to time request, and such other information with respect to the
business, condition or operations of the Borrower or either Guarantor,
financial or otherwise, as the Lender may from time to time reasonably
request.

<PAGE> 51

8.7 Performance of Agreements. Duly and punctually pay and perform each
of its obligations under this Agreement and the other Loan Documents.

8.8 Notices. Promptly give notice to the Lender:

(a) of the occurrence of any Portfolio Event, Default or Event of
Default, stating that such notice is a "notice of portfolio event" or "notice of
default," as the case may be;

(b) of any (i) default or event of default under any contractual
obligation of the Parent or any of its Subsidiaries or (ii) litigation,
investigation or proceeding to which the Parent or any of its Subsidiaries is a
party, including any which may exist at any time between the Parent or any of
its Subsidiaries and any Governmental Authority, which in either case, if not
cured or if adversely determined, as the case may be, could have a material
adverse effect on the business, operations, property or financial or other
condition of the Borrower or either Guarantor;

(c) of the occurrence of any event which could have a material adverse
effect upon the business, properties, liabilities, condition (financial or
otherwise), results of operations or prospects of the Borrower or either
Guarantor, or upon the ability of the Borrower or either Guarantor to perform
its respective obligations under this Agreement or any other Loan Document to
which it is a party;

(d) of any material change to the Borrower's credit and collection
practices and policies with respect to or affecting a material amount of the
Receivables;

(e) of any notification, whether written or oral, made or caused to be
made by the Borrower to any Obligor affecting the instructions to such Obligor
with respect to the address to which such Obligor is to send, or place where
such Obligor is to make, any payment to be made in respect of the Receivables;
and

(f) of any notification, whether written or oral, made or caused to be
made by the Borrower to any Obligor affecting the instructions to such Obligor
with respect to any matter (other than such matter specified in (e) above)
regarding any payment to be made in respect of a material amount of the
Receivables.

<PAGE> 52

Each notice pursuant to this subsection shall be accompanied by a statement of a
responsible officer setting forth details of the occurrence referred to therein
and stating what action the Parent or the Borrower, as the case may be,
propose(s) to take with respect thereto.

8.9 Compliance with Policies and Contracts. Comply in all material
respects with the Borrower's credit and collection practices and policies in
regard to each Receivable and any contract related to such Receivable.

8.10 Instructions to Obligors. Instruct all Obligors to cause all
amounts to be paid by any Person in respect of any Receivable to be deposited
directly into a Lock-Box.

8.11 Books and Records. Keep, or cause to be kept, adequate records and
books of account, in which complete entries are to be made reflecting its
business and financial transactions, such entries to be made in accordance with
GAAP as in effect in the United States consistently applied in the case of
financial transactions or as otherwise required by Applicable Laws.

8.12 Further Assurances. As from time to time requested by the Lender,
at the cost and expense of the Borrower or a Guarantor, as the case may be,
execute and deliver to the Lender all such documents and instruments and do all
such other acts and things as may be reasonably required to enable the Lender to
exercise and enforce its rights under this Agreement, and record and file and
re-record and re-file all such documents and instruments, at such time or
times, in such manner and at such place or places, all as may be necessary or
desirable to validate, preserve and protect the position of the Lender under the
Loan Documents. The Lender may, upon any extension of this Agreement, request an
opinion of counsel, selected by the Borrower or a Guarantor, as the case may be,
and approved by the Lender, with respect to action required to be taken for the
protection of the rights of the Lender hereunder and under the other Loan
Documents.

8.13 Other Agreements. Comply in all respects with all indentures,
loan or credit agreements and any other agreement, lease or instrument to which
the Borrower or either Guarantor is a party.

<PAGE> 53
8.14 Insurance. Maintain, and with respect to the Parent and Proliq
maintain and cause each of its respective Subsidiaries to maintain, with
financially sound and reputable insurers, insurance as may be required by
Applicable Law and such other insurance, to such extent and against such hazards
and liabilities, as is customarily maintained by companies similarly situated.

SECTION 9. NEGATIVE COVENANTS

The Borrower and each Guarantor covenants and agrees with the Lender
that, from and after the Effective Date and so long as this Agreement shall
remain in effect or Loans or any other amounts owing under this Agreement shall
be unpaid, the Parent, with respect to the negative covenants set forth in
Sections 9.2, 9.3, 9.4, 9.5, 9.6 and 9.7, Proliq, with respect to the negative
covenants set forth in Sections 9.3, 9.4, 9.5, 9.6, 9.7 and 9.9, and the
Borrower, with respect to the negative covenants set forth in Sections 9.1, 9.3,
9.4, 9.5, 9.7, 9.8 and 9.9, will not, directly or indirectly, unless the Lender
shall otherwise consent in writing:

9.1 Use of Proceeds. Use the proceeds of the Loans for any purpose
other than to pay fees and transaction expenses incurred in connection with the
transactions contemplated by the Loan Documents and provide funds for general
corporate purposes in accordance with the terms of this Agreement.

9.2 Financial Covenants.

(a) Current Ratio. Permit, as at the end of each fiscal quarterly
period of the Parent, the ratio of Consolidated Current Assets to Consolidated
Current Liabilities to be less than 1.00 to 1.00.

(b) Consolidated Tangible Net Worth. Permit, as at the end of each
fiscal quarterly period of the Parent, Consolidated Tangible Net Worth to be
less than $33,000,000, plus an amount equal to 50% of positive Consolidated Net
Income for each quarter beginning with the quarter commencing on July 1, 1993,
and each quarter thereafter on a cumulative basis. For purposes of this
subsection (b), the phrase "positive Consolidated Net Income" shall mean
Consolidated Net Income which, when computed, results in a positive amount, and
excludes, and does not include, the

<PAGE> 54
effect of any such amount which, when computed, results in a negative amount.

(c) Debt Coverage. Permit, as at the last day of each calendar quarter
and at any time thereafter until the last day of the next succeeding calendar
quarter, the ratio of Consolidated Cash Flow to Adjusted Consolidated Principal
Debt (excluding the Bay Springs Subordinated Debt) to be less than 1.25 to 1.00,
as such Consolidated Cash Flow and Adjusted Consolidated Principal Debt, and
component elements thereof, are computed and determined as of each such
quarterly date.

(d) Debt-to-Capitalization Ratio. Permit, as at the end of each fiscal
quarterly period of the Parent, the ratio of (i) the Debt of the Parent and its
Subsidiaries taken on a consolidated basis to (ii) the sum of (A) the Debt of
the Parent and its Subsidiaries taken on a consolidated basis and (B)
Consolidated Tangible Net Worth, to exceed 0.60 to 1.00.

9.3 Amendments. Amend, or consent to any amendment, waiver, supplement
or modification of (i) any term or condition of any Receivable or any contract
related thereto, in each case so as to extend the maturity thereof or (ii) any
of the Borrower's credit and collection practices and policies affecting a
material amount of the Receivables.

9.4 Maximum Credits Outstanding. Permit the aggregate principal
amount of outstanding Loans to exceed the lesser of (A) the Borrowing Base and
(B) the Loan Commitment.

9.5 Prohibition of Fundamental Changes. Wind-up, liquidate or dissolve
its affairs or enter into any transaction of merger or consolidation, or convey,
sell, lease or otherwise dispose of (or agree to do any of the foregoing at any
future time), whether in one or a series of transactions, all or substantially
all of its assets, or permit any of its Subsidiaries to do any of the foregoing;
provided, however, that (i) any Subsidiary of the Parent may merge or
consolidate with the Borrower or any other Subsidiary thereof and (ii) any
Subsidiary of the Parent may sell, lease, transfer or otherwise dispose of any
or all of its assets to the Borrower or any other Subsidiary of the Parent.

<PAGE> 55

9.6 Dividends. Declare or pay any dividends or make any other payment
on account of, or permit any of its Subsidiaries to declare or pay any dividends
or make any other payment on account of, its Capital Stock, or return any
capital to its stockholders, or make any distributions of its assets to its
stockholders; provided, however, (i) the Parent may declare and pay dividends on
account of its Capital Stock in an aggregate amount not exceeding an amount
equal to 50% of its Consolidated Net Income for the period from September 30,
1993 to such time so long as (A) payments thereof are made within the time
permitted under Delaware law as in effect from time to time, (B) no "Default,"
"Event of Default" or "Restriction Event" as such terms are defined and used in
the KCS Credit Agreement, exists at the time of such payment, (C) such payment
does not create or result in a Portfolio Event or a Default under this Agreement
or in a "Default," "Event of Default" or "Restriction Event" as such terms are
defined and used in the KCS Credit Agreement, (ii) each Subsidiary of KCS
Resources, Inc., KCS Pipeline Systems, Inc. and Proliq, Inc. may declare and pay
dividends to its respective parent on account of Capital Stock of such
Subsidiary, and (iii) each Subsidiary of the Parent may declare and pay
dividends to the Parent, directly or indirectly, as applicable, for the purpose
of the Parent satisfying its obligations under this Agreement and the Amended
and Restated Guaranty Agreement dated March 15, 1994 made by the Parent in favor
of Bank One Texas, National Association, provided that such dividends are so
used by the Parent.

9.7 Business. Make any change in the character of its business or in
the Borrower's credit and collection policies and procedures which could, in
either case, impair the collectibility of any Receivable.

9.8 No Commingling. Deposit or otherwise credit, or cause or permit to
be so deposited or credited, to any Lock-Box cash or cash proceeds other than
payments made by a Person in respect of a Receivable.

9.9 Capital Stock. With respect to Proliq, issue any Capital Stock,
other equity securities or any other ownership interest in Proliq (including,
without limitation, stock or securities exchangeable for or convertible into
Capital Stock, other equity securities or ownership interests) to any Person
other than the Parent, and with respect to the Borrower, issue any Capital
Stock, other equity securities or any other ownership interest in the

<PAGE> 56

Borrower (including, without limitation, stock or securities exchangeable for or
convertible into Capital Stock, other equity securities or ownership interests)
to any Person other than Proliq.

SECTION 10. PORTFOLIO EVENTS

10.1 Portfolio Events. In the case of the happening of any of the
following events (herein sometimes called "Portfolio Events"):

(a) the average of the current month's and the immediately preceding
month's Default Ratio shall equal or exceed the Historical Default Ratio at
such time; or

(b) the aggregate amount of charge-offs during any month with respect
to the Receivables shall exceed 2% of the aggregate outstanding balance of
Receivables on the last day of such month; or

(d) if at any time, the average of the current month's and the
immediately preceding month's Dilution Ratios shall equal or exceed the
product of (i) 1.5, and (ii) the highest of the Dilution Ratios determined
for each full calendar month during the period of twelve (12) full calendar
months preceding the full calendar month most recently completed determined
at such time;

then, at any time after the occurrence of such event, the Lender may take one or
more of the following actions: (i) give notice (which may be telephone notice
confirmed in writing) to the Borrower and the Guarantors of the occurrence of a
Portfolio Event and terminate the Lender's obligation to make Loans; (ii) by
notice to the Borrower and the Guarantors declare the unpaid principal amount
and interest under the Note, the Loans and all other amounts payable to the
Lender by the Borrower hereunder to be due and payable on the sixtieth (60th)
day after the occurrence of such Portfolio Event (the "Portfolio Maturity
Date"); (iii) by notice to the Borrower and the Guarantors require that the
Borrower pay to the Lender the amounts set forth in Section 2.5(b) on each
Business Day following such notice; and (iv) any and all other and further acts
and actions as are set forth in Article V of the Security Agreement in the case
of any Portfolio Event. The Borrower's failure to pay

<PAGE> 57

to the Lender the amounts set forth in clause (ii) above on or prior to the
Portfolio Maturity Date, and the Borrower's failure to pay to the Lender the
amounts set forth in clause (iii) above in accordance with Section 2.5(b), shall
constitute an Event of Default, entitling the Lender to exercise all of the
rights and remedies set forth in Section 11 and in the Security Agreement and in
the Pledge Agreement. Neither the declaration of a Portfolio Event nor the
taking of any of the actions specified above shall in any way limit the Lender's
right to declare an Event of Default and take the actions specified in
Section 11.1 as a result of the occurrence of one or more events specified in
Section 11.1.

SECTION 11. EVENTS OF DEFAULT

11.1 Events of Default. In case of the happening of any of the
following events (herein sometimes called "Events of Default"):

(a) the principal amount of any Loan or any Note, any interest payable
thereon, the Structuring Fee, the Commitment Fee or any other fees related
to this Agreement or the transactions contemplated hereby or any other
amount payable under this Agreement shall not be paid in full on the date
due and payable; or

(b) any representation or warranty made or deemed to be made or
reaffirmed by the Borrower, either Guarantor or any other Person herein or
in any Loan Document, certificate, agreement, instrument or statement
contemplated by or made or delivered pursuant to or in connection herewith,
shall prove to have been incorrect when made or deemed made; or

(c) the Borrower or either Guarantor shall fail to perform or observe
any term, covenant or agreement contained in this Agreement or any other
Loan Document; or

(d) any Loan Document shall, at any time after its execution and
delivery, for any reason cease to be in full force and effect (unless such
occurrence is in accordance with its terms or after payment thereof) or
shall be declared to be null and void or the validity or enforceability
thereof shall be contested by the Borrower or either Guarantor, or the
Borrower or either

<PAGE> 58

Guarantor shall deny that it has any or further liability or obligation
thereunder; or

(e) the Borrower, either Guarantor, KCS Resources, Inc. or KCS Pipeline
Systems, Inc. shall (i) apply for or consent to the appointment of, or the
taking of possession by, a receiver, custodian, trustee or liquidator of
itself or of all or a substantial part of its property, (ii) admit in
writing its inability, or be generally unable, to pay its debts as they
become due, (iii) make a general assignment for the benefit of its
creditors, (iv) commence a voluntary case under the Federal Bankruptcy Code
(as now or hereafter in effect), (v) be adjudicated a bankrupt or insolvent,
(vi) commence a voluntary case under, or file a petition seeking to take
advantage, of any other law relating to bankruptcy, insolvency,
reorganization, winding-up or composition or adjustment of debts, (vii) fail
to controvert in a timely and appropriate manner, or acquiesce in writing
to, any allegations, or any petition filed, against it in an involuntary
case under such Federal Bankruptcy Code or other law, or (viii) take any
corporate action for the purpose of effecting any of the foregoing; or

(f) a proceeding or case shall be commenced without the application or
consent of the Borrower or either Guarantor or any Subsidiary of any of them
in any court of competent jurisdiction, seeking (i) the liquidation,
reorganization, dissolution or winding-up, or the composition or
readjustment of debts, of the Borrower or either Guarantor or any Subsidiary
of any of them, (ii) the appointment of a trustee, receiver, custodian,
liquidator, supervisor or the like of the Borrower or either Guarantor or
any Subsidiary of any of them or of all or any substantial part of their
respective assets or (iii) similar relief in respect of the Borrower, either
Guarantor or any Subsidiary of any of them under any law relating to
bankruptcy, insolvency, reorganization, winding-up or composition or
adjustment of debts, and such proceeding or case shall continue undismissed,
or an order, judgment or decree approving or ordering any of the foregoing
shall be entered and continue unstayed and in effect, for a period of sixty
consecutive days, or an order for relief against the Borrower or either
Guarantor or any Subsidiary of any of them shall be entered in an
involuntary case under the Federal Bankruptcy Code (as

<PAGE> 59

now or hereafter in effect); or any judgment, writ, warrant of attachment or
execution or similar process shall be issued or levied in respect of an
obligation (alleged or otherwise) of the Borrower or either Guarantor or any
Subsidiary of any of them against a substantial part of its respective
properties and such judgment, writ, or similar process shall not be
released, vacated, stayed or fully bonded within thirty days after its issue
or levy; or

(g) the Borrower, either Guarantor, KCS Resources, Inc. or KCS Pipeline
Systems, Inc. shall fail to pay when due any amount in respect of any
Indebtedness in excess of $500,000 in the aggregate for money borrowed or
for the deferred purchase price of property created, issued, guaranteed,
incurred or assumed by such Person or any other event shall occur or any
condition shall exist in respect of any such Indebtedness the effect of
which is to cause (or permit any holder thereof or a trustee to cause),
without giving effect to the giving of notice or the lapse of time, or both,
such Indebtedness to become due prior to its stated maturity, provided,
however, that an event described in this subsection (g) permitting the
acceleration of any Indebtedness shall not constitute an Event of Default
hereunder until the earlier of (1) the acceleration of such Indebtedness and
(2) the fifth day after the occurrence of such event; or

(h) the Parent shall not directly or indirectly own 100% of all of the
outstanding Capital Stock of each of Proliq and the Borrower; or

(i) Proliq shall not directly or indirectly own 100% of all of the
outstanding Capital Stock of the Borrower; or

(j) the lien of the Security Agreement in favor of the Lender shall
cease to be a valid assignment of, and valid and perfected first priority
lien upon and security interest in, the Assigned Collateral, as security for
the repayment of the Borrower's obligations under this Agreement, or such
lien shall cease to be valid as against creditors of the Borrower; or

(k) the lien of the Pledge Agreement in favor of the Lender shall cease
to be a valid assignment of, and valid and perfected first priority lien
upon and

<PAGE> 60
security interest in, the Pledged Collateral, as security for the payment of
Proliq's obligations hereunder, or such lien shall cease to be valid as
against creditors of Proliq; or

(l) a final judgment or judgments for the payment of money in excess of
$500,000 in the aggregate shall be rendered by a court or courts against the
Borrower or either Guarantor or any of their respective Subsidiaries
(exclusive of any judgment amount fully covered by insurance where the
insurer has admitted liability in respect of such judgment amount), and the
same shall not be discharged (or provision shall not be made for such
discharge), or a stay of execution thereof shall not be procured, within
thirty (30) days from the date of entry thereof; or

(m) a Termination Event shall have occurred with respect to a Plan,
resulting in the imposition of liability against the Borrower or either
Guarantor; or

(n) a Portfolio Event shall have occurred and the Borrower shall have
failed to pay all amounts due to the Lender pursuant to Section 10.1 on or
prior to the Portfolio Maturity Date; or

(o) a material adverse change shall occur in the financial condition
or operations of the Borrower or either Guarantor;

then, at any time after the occurrence of such event, the Lender may take one or
more of the following actions: (i) give notice (which may be telephone notice
confirmed in writing) to the Borrower and the Guarantors of the occurrence of an
Event of Default, and the date of the giving of such notice shall become the
Credit Expiration Date and the Lender's obligation to make Loans shall be
terminated, (ii) by notice to the Borrower and the Guarantors (except that in
the case of the occurrence of any Event of Default described in Section 11.1(e)
or 11.1(f), no such notice shall be required and such termination and
acceleration shall be automatic) declare the unpaid principal amount and
interest under the Note, the Loans and all other amounts payable to the Lender
by the Borrower hereunder to be forthwith due and payable, whereupon such
amounts shall become forthwith due and payable, both as to principal and
interest, without presentment, demand, protest or any other notice of any kind,
all of which are hereby

<PAGE> 61
expressly waived, anything contained herein or in the Note to the contrary
notwithstanding, and (iii) any and all other and further acts and actions which
the Lender may take pursuant to Article V of the Security Agreement, Article V
of the Pledge Agreement or under the Uniform Commercial Code or other Applicable
Law.

SECTION 12. FEES

12.1 Structuring Fee and Commitment Fee. As consideration for incurring
the obligation to make the Loans, the Borrower shall pay to the Lender (i) a
Structuring Fee in the amount of $125,000, which Structuring Fee shall be due
and payable on the date of execution of this Agreement and which shall be deemed
fully earned as of such date, and (ii) a daily Commitment Fee, from and
including the date of execution of this Agreement to but excluding the Credit
Expiration Date, equal to the quotient of (A) the product of (1) the positive
result of (a) the Loan Commitment, less (b) the aggregate outstanding Loans and
(2) 0.50%, divided by (B) 360. Such daily Commitment Fee shall be due and
payable in arrears on each Settlement Date.

12.2 Expenses. The Borrower shall pay, no later than thirty (30) days
after its receipt of a statement therefor, all reasonable out-of-pocket costs
and expenses incurred by the Lender (including, without limitation, the
reasonable fees and out-of-pocket expenses of Seward & Kissel, counsel to the
Lender) (i) in connection with the preparation of this Agreement and the other
Loan Documents (whether or not the transactions hereby or thereby contemplated
shall be consummated), (ii) in connection with any waivers, amendments or
extensions with respect to any of the foregoing documents, (iii) in connection
with the Loans hereunder, and (iv) in connection with the administration of the
Agreement and the other Loan Documents, including, without limitation, all
audits of the Borrower and/or the Guarantors undertaken by the Lender. The
Borrower will also pay all costs and expenses incurred by the Lender (including
the fees and out-of-pocket expenses of counsel to the Lender) in connection with
the enforcement and protection of the rights of the Lender in connection with
this Agreement and the other Loan Documents.

12.3 Invoices for Fees. The Lender shall from time to time submit to
the Borrower for payment invoices for fees under this Agreement when the same
shall become due and

<PAGE> 62

payable and for any costs and expenses incurred by the Lender in connection with
this Agreement and the transactions contemplated hereby.

SECTION 13. GUARANTY

13.1 The Guaranty. (a) Each Guarantor, jointly and severally, as
primary obligor and not merely as surety, hereby irrevocably and unconditionally
guarantee the full and prompt payment when due (whether by acceleration or
otherwise) of all obligations and liabilities of the Borrower to the Lender now
existing or hereafter incurred under, arising out of or in connection with this
Agreement or any other Loan Document (including, without limitation, principal
and interest in respect of all Loans, the Commitment Fee, the Structuring Fee,
fees payable to the Lender hereunder and other fees and expenses, indemnities
and Additional Costs) and the due performance and compliance by the Borrower
with the terms of this Agreement and the other Loan Documents to which it is a
party (all such principal, interest, obligations and liabilities, collectively,
the "Guaranteed Obligations"). All payments by the Guarantors under this
Agreement, to the extent owing to the Lender, shall be made on the same basis as
payments by the Borrower under this Agreement. In the event the Borrower shall
fail to pay or perform duly and punctually any Guaranteed Obligation when and if
the same shall be due and payable or to be performed in accordance with the
terms of this Agreement or of any other Loan Document to which the Borrower is a
party, the Guarantors will promptly pay the same to such Person to whom such
Guaranteed Obligation is due.

(b) Each of the Guarantors hereby waives in connection with any defense
to enforcement of this Agreement (a) notice of the acceptance by the Lender of
this Guaranty,(b) notice of the existence or creation or nonpayment of or other
default with respect to all or any of the Guaranteed Obligations, (c)
presentment, demand of payment, protest, notice of dishonor and all other
notices whatsoever with respect to the Guaranteed Obligations, (d) any
requirement that the Lender act with promptness or diligence in collection or
protection of or realization upon any or all of the Guaranteed Obligations or
any thereof, any obligation of the Guarantors under this Guaranty, or any
security for or guaranty of any of the foregoing; (e) any requirement that the
Lender exhaust any right or take any action against the Borrower or any other
Person or any

<PAGE> 63

Assigned Collateral, (f) any defense arising out of the absence, impairment or
loss of any or all rights of recourse, reimbursement, contribution or
subrogation or any other rights or remedies of a Guarantor against the Borrower,
any other Person, or any security, whether resulting from an election by the
Lender to foreclose on the Assigned Collateral by trustee's sale rather than
judicial foreclosure, or from any other election of rights or remedies by the
Lender, or otherwise, (g) any requirement that, absent a request for such
information by a Guarantor, the Lender advise such Guarantor of information
known to the Lender regarding the financial condition of the Borrower or any
other circumstance bearing upon the risk of nonperformance of the Guaranteed
Obligations which diligent inquiry would reveal, the Guarantors hereby assuming
responsibility for being and keeping informed of each such condition and
circumstance, (h) the benefit of any statute of limitations affecting a
Guarantor's obligations hereunder or the enforcement hereof to the fullest
extent permitted by law, the Guarantors agreeing, without limiting the
foregoing, that any circumstance which operates to toll the statute of
limitations as to the Borrower shall operate to toll any statute of limitations
as to the Guarantors, and (i) any right to exoneration of sureties which may
otherwise be applicable. Each Guarantor further waives, to the extent it may
lawfully do so, all right to have its property marshalled upon any enforcement
action by the Lender. Each Guarantor hereby represents and warrants to the
Lender, and acknowledges that the Lender shall rely upon such representation and
warranty, that each Guarantor is affiliated with the Borrower and is otherwise
in a position to have access to any and all relevant information bearing upon
the present and continuing creditworthiness of the Borrower and the risk of the
Borrower's inability to pay the indebtedness or perform the obligations
guaranteed hereby.

(c) The Lender may, at any time and from time to time without the
consent of either Guarantor, without incurring responsibility to either
Guarantor and without impairing or releasing the obligations of either Guarantor
hereunder, upon or without any terms or conditions take or refrain from taking
any and all actions with respect to the Guaranteed Obligations, this Agreement,
any other Loan Document, the Assigned Collateral, the Pledged Collateral or any
Person (including the Borrower) that the Lender determines in its sole
discretion to be necessary or appropriate.

<PAGE> 64
13.2 Obligations Absolute; Enforceability. (a) The obligations of each
Guarantor under this Guaranty are absolute and unconditional and shall remain in
full force and effect without regard to, and shall not be released, suspended,
discharged, terminated or otherwise affected by, any circumstance or occurrence
whatsoever, including, without limitation:

(i) any lack of validity or enforceability of this Agreement, the
Security Agreement, the Note, the Pledge Agreement, any Loan Document or any
other document or instrument relating to the Guaranteed Obligations;

(ii) any change in the time, manner or place of payment of, or in any
other term of, all or any of the Guaranteed Obligations, or any other
amendment or waiver of or any consent to departure from this Agreement, the
Note or any other Loan Document;

(iii) any insolvency, bankruptcy, liquidation, reorganization,
dissolution, winding up or other similar proceeding involving or affecting
the Borrower;

(iv) any change in the ownership of Capital Stock of the Borrower or any
change in the identity or structure of the Borrower, whether by
consolidation, merger or otherwise;

(v) any exchange, release or non-perfection of any collateral, or any
release or amendment or waiver of or consent to departure from any other
guaranty, for all or any of the Guaranteed Obligations;

(vi) any failure on the part of the Borrower, a Guarantor or the Lender
to perform or observe any term, covenant or agreement on its part to be
performed or observed under any Loan Document;

(vii) the existence of any Indebtedness now or at any time hereafter
payable or owing by either Guarantor to the Borrower or the existence of any
setoff, counterclaim, recoupment, defense or other right or claim which
either Guarantor may at any time have or have had against the Borrower, the
Lender or any other Person; or

(viii) any other circumstance which might otherwise constitute a defense
available to, or a discharge of,

<PAGE> 65

the Borrower in respect of the Guaranteed Obligations or the Guarantor in
respect of this Agreement, whether similar or dissimilar to any of the
circumstances specified in clauses (i) through (vii) above.

(b) The Lender may, from time to time without impairing the terms and
provisions of this Section 13, whether before or after any discontinuance of
this Agreement, at its sole discretion and without notice to, demand upon, or
consent of, the Guarantors, or either of them, take any or all of the following
actions:

(i) retain or obtain any security interest which may hereafter be
granted in any property to secure any of the Guaranteed Obligations or any
obligation of the Guarantors under this Agreement or apply any security
interest or the proceeds thereof and direct the order or manner of sale or
other disposition thereof;

(ii) retain or obtain the primary or secondary obligation of any obligor
or obligors, in addition to the Guarantors, with respect to any of the
Guaranteed Obligations;

(iii) extend or renew for one or more periods (whether or not longer than
the original period), alter or exchange any of the Guaranteed Obligations,
or release or compromise any obligation of the Guarantor under this
Agreement or any obligation of any nature of any other obligor with respect
to any of the Guaranteed Obligations;

(iv) release its security interest in, or surrender, release or permit
any substitution or exchange for, all or any part of any property securing
any of the Guaranteed Obligations or any obligation of the Guarantors under
this Agreement, or extend or renew for one or more periods (whether or not
longer than the original period), or release, compromise, alter or exchange
any obligations of any nature of any obligor with respect to any such
property;

(v) fail or delay in enforcing any of its rights under any document or
instrument related to the Guaranteed Obligations; or

(vi) resort to either Guarantor for payment of any of the Guaranteed
Obligations, whether or not the Lender

<PAGE> 66

shall have resorted to any property securing any of the Guaranteed
Obligations or any obligation of the Guarantors under this Agreement or
shall have proceeded against any other obligor primarily or secondarily
obligated with respect to any of the Guaranteed Obligations.

13.3 Waiver of Subrogation and Contribution. (a) Neither Guarantor
shall enforce or otherwise exercise any right of subrogation to any of the
rights of the Lender against the Borrower and, notwithstanding anything to the
contrary contained herein, each Guarantor hereby waives all rights of
subrogation (whether contractual, under Section 509 of the Federal Bankruptcy
Code, at law or in equity or otherwise) to the claims of the Lender against the
Borrower and all contractual, statutory or legal or equitable rights of
contribution, reimbursement, indemnification and similar rights and "claims" (as
that term is defined in the Federal Bankruptcy Code) which such Guarantor might
now have or hereafter acquire against the Borrower that arise from the existence
or performance of such Guarantor's obligations hereunder.

(b) Any amount received by the Lender from whatsoever source on account
of the Guaranteed Obligations shall be applied by it toward the payment of such
of the Guaranteed Obligations in accordance with the terms of this Agreement.

SECTION 14. INDEMNIFICATION

14.1 Indemnification by Borrower. Without limiting any other rights
which the Lender and its officers, directors, employees, agents and affiliates
may have hereunder or under Applicable Law, the Guarantors and the Borrower,
jointly and severally, hereby indemnify such parties and hold them harmless from
and against any and all damages, losses, claims, liabilities and related costs
and expenses (including attorneys' fees and disbursements) incurred by any of
them arising out of or resulting from the transactions contemplated by this
Agreement and the other Loan Documents (other than any of the foregoing arising
out of the gross negligence or willful misconduct of the Lender), including,
without limitation:

(a) the reliance by the Lender on any representation or warranty made by the
Borrower or either Guarantor (or any of their respective officers) under or in
connection with this

<PAGE> 67

Agreement or any other Loan Document which was incorrect when made;

(b) the failure by the Borrower or either Guarantor, as the case may be, to
comply with any covenant set forth in this Agreement or in any other Loan
Document to which the Borrower or such Guarantor, respectively, is a party;

(c) the failure to establish and maintain the lien of the Security Agreement
in favor of the Lender as a valid assignment of, and valid and perfected first
priority lien upon and security interest in, the Assigned Collateral, as
security for the repayment of the Borrower's obligations under this Agreement,
or the failure of such lien to be valid as against creditors of the Borrower
(except to the extent, in each case, that such failure results from an act or a
failure to act on the part of the Lender, including, with respect to any
financing statement naming the Borrower as debtor and the Lender as secured
party that is filed under the Uniform Commercial Code of any jurisdiction, the
failure of the Lender to timely file a continuation statement therefor if the
provisions of such Uniform Commercial Code permit the Lender to file such
continuation statement without the signature of the Borrower thereon);

(d) the failure to establish and maintain the lien of the Pledge Agreement
in favor of the Lender as a valid assignment of, and valid and perfected first
priority lien upon and security interest in, the Pledged Collateral, as security
for the payment of the Proliq's obligations hereunder, or the failure of such
lien to be valid as against creditors of Proliq;

(e) the use of proceeds of the Loans;

(f) the failure to timely to file financing statements or other similar
instruments or documents under the Uniform Commercial Code of any applicable
jurisdiction or other applicable laws with respect to any Receivables at any
time (except to the extent that such failure results from an act or a failure to
act on the part of the Lender, including, with respect to any financing
statement naming the Borrower as debtor and the Lender as secured party that is
filed under the Uniform Commercial Code of any jurisdiction, the failure of the
Lender to timely file a continuation statement therefor if the provisions of
such Uniform Commercial Code permit the Lender to file such continuation
statement without the signature of the Borrower thereon);

<PAGE> 68
(g) any dispute, claim, offset or defense of any Obligor to the payment of
any Receivable (including a defense based on such Receivable's or the related
contract's not being a legal, valid and binding obligation of such Obligor
enforceable against it in accordance with its terms), or any other claim
resulting from the sale, use, operation or ownership of or defects in or
breaches of warranties with respect to, the merchandise or services relating to
such Receivable or the furnishing or failure to furnish such merchandise or
services;

(h) the Borrower's failure to pay when due any taxes (including sales,
excise or personal property taxes) payable in connection with the Receivables;

(i) the commingling of collections on the Receivables with other funds of
the Borrower or any other Person; or

(j) the failure by the Borrower to comply with any Applicable Law with
respect to any Receivable, or the nonconformity of any Receivable with any such
Applicable Law.

If and to the extent that the foregoing undertaking may be unenforceable for any
reason, the Borrower hereby agrees to make the maximum contribution to the
payment of the amounts indemnified against in this Section which is permissible
under applicable law.

14.2 Notices. The Lender agrees to notify the Borrower and the
Guarantors upon its knowledge of a claim for which it intends to seek
indemnification under Section 14.1 from the Borrower and/or the Guarantors. The
Borrower and the Guarantors agree to assist the parties indemnified under
Section 14.1, to the extent requested by them, in any action, suit or proceeding
brought by or against them in connection with the indemnification granted
herein.

SECTION 15. MISCELLANEOUS

15.1 Notices. Except where telephonic (which shall be confirmed in
writing promptly) instructions or notices are authorized herein to be given, all
notices, demands, instructions and other communications required or permitted to
be given under this Agreement shall be in writing and shall be personally
delivered or sent by registered, certified or express mail, postage prepaid,

<PAGE> 69

return receipt requested, or by facsimile, or telegram (with messenger delivery
specified in the case of a telegram), and shall be deemed to be given for
purposes of this Agreement on the date on which such writing is delivered or
sent to the intended recipient thereof in accordance with the provisions of this
Section 15.1 (except that any notice sent by registered or certified mail shall
be deemed to have been given on the fifth Business Day after such notice is
deposited for delivery in the United States mail). Unless otherwise specified in
a notice sent or delivered in accordance with the foregoing provisions of this
Section 15.1, notices, demands, instructions and other communications in writing
shall be given to or made upon the respective parties hereto at their respective
addresses (or to their respective facsimile numbers) indicated below, and, in
the case of telephonic instructions or notices, by calling the telephone number
or numbers indicated for such party below:

(a) with respect to the Borrower:

KCS Energy Marketing, Inc.
379 Thornall Street
Edison, New Jersey 08837
Attention: Kathryn M. Kinnamon
Assistant Treasurer
Telephone: (908) 632-1770
Facsimile: (908) 603-8960

with a copy to:

Orloff, Lowenbach, Stifelman & Siegel, P.A.
101 Eisenhower Parkway
Roseland, New Jersey 07068
Attention: Ralph M. Lowenbach, Esq.
Telephone: (201) 622-6200
Facsimile: (201) 622-3073

<PAGE> 70

(b) with respect to the Parent:

KCS Energy, Inc.
379 Thornall Street
Edison, New Jersey 08837
Attention: Henry A. Jurand
Vice President, Treasurer
and Secretary
Telephone: (908) 632-1770
Facsimile: (908) 603-8960

with a copy to:

Orloff, Lowenbach, Stifelman & Siegel, P.A.
101 Eisenhower Parkway
Roseland, New Jersey 07068
Attention: Ralph M. Lowenbach, Esq.
Telephone: (201) 622-6200
Facsimile: (201) 622-3073

Proliq, Inc.
379 Thornall Street
Edison, New Jersey 08837
Attention: Kathryn M. Kinnamon
Assistant Treasurer
Telephone: (908) 632-1770
Facsimile: (908) 603-8960

with a copy to:

Orloff, Lowenbach, Stifelman & Siegel, P.A.
101 Eisenhower Parkway
Roseland, New Jersey 07068
Attention: Ralph M. Lowenbach, Esq.
Telephone: (201) 622-6200
Facsimile: (201) 622-3073

<PAGE> 71

Canadian Imperial Bank of Commerce
425 Lexington Avenue
New York, New York 10017
Attention: Asset Securitization Group
Telephone: (212) 856-3850
Facsimile: (212) 856-3643

Any party may designate a different or additional address for the delivery of
notices by providing notice thereof to the other parties. Except as provided to
the contrary above, all notices, demands, and other communications shall be
effective upon personal delivery or upon the date of receipt by the addressee as
shown on the return receipt. Rejection or other refusal to accept notices,
demands, or other communications shall be of no effect, and all notices,
demands, and other communications which are rejected or acceptance of which is
refused shall be deemed to be effective upon the date on which the same were
rejected or refused.

15.2 Survival and Termination of Agreement. All covenants, agreements,
representations and warranties made herein and in the certificates and other
documents delivered pursuant hereto shall survive (i) the making by the Lender
of the Loans herein contemplated, (ii) the execution and delivery to the Lender
of the Note, and (iii) the making of any investigation, and shall continue in
full force and effect to the Credit Expiration Date or so long as any Loan or
any amount payable to the Lender in connection with this Agreement is unpaid
whichever is later, at which time this Agreement shall terminate, it being
expressly understood that the obligations of the Borrower under Sections 5.1,
5.5, 8.7 and 12 hereof shall survive any termination of this Agreement.

15.3 Applicable Law. THIS AGREEMENT AND THE NOTE SHALL BE CONSTRUED
IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK.

15.4 Waiver; Modifications in Writing. No failure or delay on the part
of the Lender in exercising any right, power or remedy hereunder or under the
Note or with respect to the Loans shall operate as a waiver thereof, nor shall
any single or partial exercise of any such right, power or remedy preclude any
other or further exercise thereof or the exercise of any other right, power or
remedy. The remedies

<PAGE> 72

provided for herein are cumulative and are not exclusive of any remedies that
may be available to the Lender at law or in equity. No amendment, modification,
supplement, termination or waiver of or to any provision of this Agreement, nor
consent to any departure by the Borrower or either Guarantor therefrom, shall be
effective unless the same shall be in writing and signed by or on behalf of the
Lender except that any amendment, modification, or waiver (i) reducing the
principal amount of, reducing the interest rate borne by, or extending the final
maturity of the Loans, or (ii) reducing the amount of the fees payable pursuant
hereto, or (iii) changing the provisions contained in this Section 15.4 or (iv)
releasing Assigned Collateral or Pledged Collateral, except to the extent the
sale of such Assigned Collateral or Pledged Collateral is permitted by this
Agreement, the Security Agreement or the Pledge Agreement, shall not be
effective unless evidenced by a writing signed by or on behalf of the Lender.
Any waiver of any provisions of this Agreement, and any consent to any departure
by the Borrower or either Guarantor from the terms of any provision of this
Agreement, shall be effective only in the specific instance and for the specific
purpose for which given. No notice to or demand on the Borrower or a Guarantor
in any case shall entitle the Borrower or a Guarantor to any other or further
notice or demand in similar or other circumstances.

15.5 Non-Waiver of Rights. Neither any failure nor any delay on the
part of the Lender in exercising any right, power or privilege hereunder or
under the Loan Documents shall operate as a waiver thereof, nor shall a single
or partial exercise thereof preclude any other or further exercise of any other
right, power or privilege.

15.6 Successors and Assigns. (a) This Agreement shall be binding upon
and inure to the benefit of each party hereto and its respective successors and
assigns, except that neither the Borrower nor either Guarantor shall assign or
transfer (by operation of law or otherwise) all or any part of their respective
rights or obligations hereunder without the prior written consent of the Lender.

(b) Notwithstanding the foregoing, the Lender may at any time change
the Booking Office designated by it on Schedule 1. The Lender shall give prompt
notice to the Borrower of any change in any Booking Office.

<PAGE> 73

15.7 Right to Grant Assignments and Participations. The Borrower, the
Guarantors and the Lender agree that the Lender may, from time to time, sell a
portion of the Lender's obligation to make Loans hereunder and of the Lender's
rights hereunder, or grant participations herein, to financial institutions. Any
such financial institution shall have the same rights as the Lender in respect
of the rights granted to the Lender under Sections 5.1 and 5.5 and under Section
13. In such connection, it is agreed that the Lender shall not be responsible
for a failure by any such financial institution, and that each such financial
institution shall not be responsible for a failure by the Lender (or another
such financial institution), to make or fund, as the case may be, its pro rata
portion of any Loan. The Lender may furnish any information concerning the
Borrower or either Guarantor in the possession of the Lender from time to time
to such financial institutions (including prospective purchasers of assignments
and participations hereunder).

15.8 Captions. Captions and section headings appearing herein are
included solely for convenience of reference and are not intended to affect the
interpretation of any provision of this Agreement.

15.9 Counterparts. This Agreement may be executed in counterparts
which, taken together, shall constitute a single document.

15.10 Severability. In case any one or more of the provisions contained
in this Agreement or any Note should be invalid, illegal or unenforceable in any
respect, the validity, legality and enforceability of the remaining provisions
contained herein and therein shall not in any way be affected or impaired
thereby.

15.11 Waiver of Trial by Jury; Consent to Jurisdiction. THE PARTIES
HERETO, TO THE EXTENT PERMITTED BY LAW, WAIVE TRIAL BY JURY IN ANY LITIGATION IN
ANY COURT WITH RESPECT TO, IN CONNECTION WITH, OR ARISING OUT OF, THIS AGREEMENT
OR ANY INSTRUMENT OR DOCUMENT DELIVERED PURSUANT TO THIS AGREEMENT, OR THE
VALIDITY, PROTECTION, INTERPRETATION, COLLECTION OR ENFORCEMENT THEREOF. Each of
the Borrower and each Guarantor irrevocably consents that any legal action or
proceeding against it under, arising out of or in any manner relating to this
Agreement or any instrument or document delivered pursuant to this Agreement may
be brought in the Supreme Court of the State of New

<PAGE> 74

York, County of New York, or in the United States District Court for the
Southern District of New York. Each of the Borrower and each Guarantor, by its
execution and delivery of this Agreement, expressly and irrevocably assents and
submits to the personal jurisdiction of any of such courts in any such action or
proceeding. Each of the Borrower and each Guarantor has irrevocably appointed
The Corporation Trust Company, 1633 Broadway, New York, New York 10019, as its
agent to receive, accept and acknowledge for and on its behalf, service of any
and all legal process, summons, notices and documents which may be served in any
proceeding brought in any court which may be made on such agent. If for any
reason such agent shall cease to be available to act as such, each of the
Borrower and each Guarantor agrees to designate a new agent in The City of New
York on the terms and for the purposes of this Section 15.11 satisfactory to the
Lender. Each of the Borrower and each Guarantor further irrevocably consents to
the service of summons, notice, or other process relating to any such action or
proceeding by delivery thereof to it by hand or by mail in the manner provided
for in Section 15.1 hereof. Each of the Borrower and each Guarantor hereby
expressly and irrevocably waives any claim or defense in any such action or
proceeding in either such court based on any alleged lack of personal
jurisdiction, improper venue or forum non conveniens or any similar basis.
Nothing in this Section 15.11 shall affect or impair in any manner or to any
extent the right of Lender to commence legal proceedings or otherwise proceed
against the Borrower or either Guarantor in any jurisdiction or to serve process
in any manner permitted by law.

15.12 Set-off. The Lender (including any of its branches) is hereby
authorized at any time or from time to time, without notice to the Borrower,
either Guarantor or to any other Person, any such notice being hereby expressly
waived, to set off and to appropriate (i) any and all deposits (general or
special, matured or unmatured, time or demand, in whatever currency) and any
other Indebtedness at any time held or owing by the Lender to or for the credit
or the account of the Borrower against and on account of the obligations and
liabilities of the Borrower to the Lender under this Agreement or any other Loan
Document, and (ii) any and all deposits (general or special, matured or
unmatured, time or demand, in whatever currency) and any other Debt at any time
held or owing by the Lender to or for the credit or the account of either
Guarantor against and on account of the obligations and liabilities of such
Guarantor to the Lender under this Agreement or any other Loan

<PAGE> 75

Document, irrespective of whether or not the Lender shall have made any demand
hereunder and although said obligations, liabilities or claims, or any of them,
shall be contingent or unmatured.

<PAGE> 76

IN WITNESS WHEREOF, the Borrower, each Guarantor and the Lender have
caused this Agreement to be duly executed by their duly authorized officers, all
of the day and year first above written.

KCS ENERGY MARKETING, INC.,
as Borrower

By
-------------------------------
Authorized Signatory

KCS ENERGY, INC., as Guarantor

By
-------------------------------
Authorized Signatory

PROLIQ, INC., as Guarantor

By
-------------------------------
Authorized Signatory

CANADIAN IMPERIAL BANK OF
COMMERCE, as Lender

By
-------------------------------
Authorized Signatory

<PAGE> 77

Schedule 1
to the Loan Agreement

Booking Offices

Alternate Base Rate Lending Office:

425 Lexington Avenue
New York, New York 10017

Eurodollar Lending Office:

425 Lexington Avenue
New York, New York 10017

<PAGE> 78

Schedule 2
to the Loan Agreement

List of Special Concentration Limits

<TABLE>
<CAPTION>
Name of Obligor Amount
--------------- ------
<S> <C>
Amerada Hess $3,500,000
Cabot Oil and Gas 2,500,000
ENSERCH 1,200,000
Enron\Enron Gas Marketing 1,800,000
Chevron Corp. 1,600,000
Natural Gas Pipeline\Midcon 1,200,000
Valero Energy 1,200,000
Tenneco\Tenneco Gas Marketing 1,200,000
Louisiana Power and Light 1,200,000
Philadelphia Gas Works 2,700,000
Power Authority of New York 2,000,000
</TABLE>

<PAGE> 79

Schedule 3
to the Loan Agreement

List of Lock-Boxes

Address of Lock-Box
Lock-Box Address Bank and Account No.

1. KCS Energy Marketing, Inc. First Fidelity Bank, N.A.
P.O. Box 18032 570 Broad Street, A57005
Newark, New Jersey 07191 Newark, New Jersey 07102
Account No. 81305-187-33

2. KCS Energy Management First Fidelity Bank, N.A.
Services, Inc. 570 Broad Street, A57005
P.O. Box 18309 Newark, New Jersey 07102
Newark, New Jersey 07191 Account No. 300-027346-0

<PAGE> 80

Schedule 4
to the Loan Agreement

List of Volumetric Production Payment Contracts

1. Purchase and Sale Agreement made and entered into between Hall-Houston Oil
Company, Inc., a Texas Corporation ("Seller") and KCS Energy Marketing, Inc., a
New Jersey corporation ("Buyer") dated September 30, 1994 as amended by the
First Amendment to Purchase and Sale Agreement, dated October 31, 1994, any
further amendments or modifications thereto, and all conveyances of Production
Payment and Production and Delivery Agreements entered into pursuant to such
Purchase and Sale Agreement, as amended.

2. Production and Delivery Agreement made and entered into between Offshore Gas
Partners, L.C., a Texas limited liability company ("Seller") and KCS Energy
Marketing, Inc., a New Jersey corporation ("Buyer") dated August 1, 1994, and
any amendments or modifications thereto and all Conveyances of Production
Payment entered into in connection with the Production and Delivery Agreement.

3. Any other volumetric production payment contracts entered into by Borrower or
acquired by Borrower hereafter in which or in the proceeds of which Comerica
Bank-Texas shall have a security interest.

<PAGE> 81

Schedule 6.22
to the Loan Agreement

Trade Names

The Borrower is registered to use the name "KCS Energy Management
Services, Inc." for the transaction of business in the State of New Jersey.

<PAGE> 82

Schedule 6.6
to the Loan Agreement

Pending Litigation

1. No. 93-65292; KCS Energy Marketing, Inc. vs. The Polaris Pipeline
Corporation; 270th Judicial District Court of Harris County, Texas. The
plaintiff seeks payment due on a natural gas account of approximately
$53,000, court costs, attorneys fees, and punitive damages based on
defendant's fraudulent conduct.

2. No. 94-1706; KCS Energy Marketing, Inc. vs. Federal Energy Regulatory
Commission; United States Court of Appeals for the District of Columbia
Circuit. Petitioner seeks review and reversal of three FERC Orders denying
Petitioner a refund of PSP charges previously paid to Transcontinental Gas
Pipe Line Corporation.

3. No. 90CI-12181; Tennessee Gas Pipeline Company v. The Lenape Resources
Corporation (d/b/a/ Pomfret Production Co., Inc., and d/b/a Enercorp
Resources, Inc.) ("KCS"), Tesoro Exploration and Production Company, Gulf
Energy Pipeline Company and Coastal Oil and Gas Corporation; 57th District
Court of Bexar County, Texas (the "Tennessee Pricing Suit"). This is a
case in which plaintiff seeks to avoid taking and paying for gas under an
agreement (the "Tennessee Gas Agreement") with defendants that calls for a
higher than market price.

In June, 1992 the Texas District Court upheld the contract and also awarded
Lenape approximately $760,000 for legal fees and past underpayments.
Tennessee Gas' subsequent motion for rehearing or a new trial on the issue
of the appropriate price was denied by the District Court in September,
1992. The parties then filed appeals with the Texas Fourth Court of Appeals
in San Antonio, Texas.

In August, 1993, the Court of Appeals affirmed the lower court's decision
that the leases were subject to the contract that the price payable by
Tennessee Gas should be determined in accordance with Section 102(b)(2) of
the NGPA and that KCS had the right to pool the leases, the production from
which

-1-

<PAGE> 83
would be covered by the contract on a prorata acreage basis.

The Court of Appeals also ruled that the lower court erred in granting
summary judgment that the contract was not an output contract governed by
the Texas Uniform Commercial Code ("Code"). In its judgment, the Court of
Appeals ruled that the contract was subject to Section 2.306 of the Code,
that new wells could be drilled and production increased, but that such
increases were subject to the good faith and reasonableness provisions of
the Code, an issue remanded to the lower court for trial. The Court of
Appeals also set aside the lower court's awards to KCS of legal fees and
past underpayments, pending the outcome of the trial on the output issue.

In June, 1994, the Texas Supreme Court agreed to hear and decide the output
issue raised by KCS in its application for a writ of error and to hear and
decide certain of the issues which Tennessee Gas raised in its application
for a writ of error involving rulings of the Court of Appeals which had
been decided in favor of KCS. Oral argument before the Texas Supreme court
was held December 13, 1994.

4. No. 3,448; Tennessee Gas Pipeline Company v. KCS Resources, Inc.; 49th
District Court, Zapata County, Texas. The suit also involves the Tennessee
Gas Agreement. Plaintiff claims the defendant injected propane into the
gas delivered under the Tennessee Gas Agreement, thereby increasing the BTU
content of the gas in order to bring the BTU content up to the requirements
of the Tennessee Gas Agreement. Plaintiff claims that this is not
permitted under the Tennessee Gas Contract, so that plaintiff is not
obligated to purchase the gas.

On November 28, 1994, KCS Resources filed its Answer denying all
allegations and seeking a stay of this litigation until the Texas Supreme
Court decides the issues in the Tennessee Pricing Suit.

5. No. 94-12219; Coastal Oil & Gas Corporation and Tesoro E&P Company,
L.P., Plaintiffs vs. Jose de los Santos, et al., Defendants and KCS
Resources, Inc., Plaintiff-Intervenor, vs. Jose de los Santos, et al.,
Defendants, and Tomas Chapa Yzaquirre, et al. Intervention

-2-
<PAGE> 84
Defendants, 193rd District Court, Dallas County, Texas. This suit seeks a
declaratory judgment that gas royalties due owners of royalty interests on
the properties subject to the Tennessee Gas Contract be computed on the
basis of current market price, and not on the basis of the much higher
price under the Tennessee Gas Contract. The plaintiffs also seek judgment
that the royalty owners were paid properly for past production sold under
the Tennessee Gas Contract.

6. No. 3463; Las Blancas Minerals, Ltd., et al, v. Coastal Oil & Gas
Corporation, Tesoro E&P Company, L.P. and KCS Resources, Inc., 49th
District Court, Zapata County, Texas. The royalty owners in Case No.
94-12219 (described above) filed for relief against the plaintiffs in that
case, to require that royalties be paid based upon the Tennessee Gas
Contract price. Relief is also sought for breach of implied marketing and
lease administration obligations, injuring and conspiring to injure the
real property and contractual rights, and to impose a constructive trust on
the working interests of KCS, Tesoro and Coastal to prevent fraud.

On 1/9/95, KCS will file a denial and ask that the suit be stayed pending
resolution of Case No. 94-12219.

-3-
<PAGE> 85
Schedule 8.6(g)
to the Loan Agreement

Form of Mid-Month Report

MID-MONTH REPORT KCS Energy Marketing, Inc.
Date: ____________ to ______________

GAS MARKETING DIVISION OF KCS ENERGY MARKETING, INC.

Delivered Average Gross
Pipeline Volumes Sales Rate Revenues
- - - - -------- --------- ---------- --------
<S> <C> <C> <C>

Sub-total:

</TABLE>

ENERGY MANAGEMENT SERVICES DIVISION OF KCS ENERGY MARKETING INC.

Delivered Average Gross
Enduser Volumes Sales Rate Revenues
- - - - ------- --------- ---------- --------
<S> <C> <C> <C>

CONSOLIDATED TOTALS
</TABLE>
<PAGE> 86

EXHIBIT A
to the Loan Agreement

[Form of Note]

$_______________ January __, 1995

FOR VALUE RECEIVED, on the Credit Expiration Date (as defined in
Section 4.1 of the Loan Agreement hereinafter referred to), the undersigned
hereby promises to pay to the order of CANADIAN IMPERIAL BANK OF COMMERCE (the
"Lender"), the principal sum which is the lesser of ____________ ($_______) and
the aggregate unpaid principal amount from time to time outstanding of all Loans
made by the Lender, to the undersigned pursuant to Section 2.1 of the Loan
Agreement, in immediately available funds and in lawful money of the United
States of America, and to pay interest on the unpaid balance of said principal
sum from time to time outstanding, from the date hereof, until the principal sum
shall become due (whether by acceleration or otherwise), in like funds and
money, at the office of the Lender as shall be designated by the Lender, as
provided in said Loan Agreement for Loans made by the Lender and at the maturity
hereof.

This promissory note is the Note referred to in the Loan Agreement
dated as of January 11, 1995 (as the same may from time to time be amended, the
"Loan Agreement"), among the undersigned, KCS Energy, Inc., Proliq, Inc. and the
Lender, to which Loan Agreement reference is made for a description of the
rights of prepayment, the Events of Default and the rights of acceleration of
maturity upon the occurrence of an Event of Default. All advances made by the
Lender to the undersigned pursuant to the Loan Agreement and all payments made
on account of principal hereof shall be recorded by the Lender and, prior to any
transfer hereof, endorsed on the grid attached hereto which is part of this
promissory note (provided that any failure by the Lender to make any such
endorsement shall not affect the obligations of the undersigned under this Note
in respect of any such advance).

THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE
STATE OF NEW YORK.

KCS ENERGY MARKETING, INC.

By:
-------------------------
Authorized Signatory

<PAGE> 87

[REVERSE OF NOTE OR SCHEDULE THERETO]

This Note evidences Loans made by the Lender under Section 2.1 of the
Loan Agreement dated as of January 11, 1995, as from time to time amended, among
KCS ENERGY MARKETING, INC., KCS Energy, Inc., Proliq, Inc. and the Lender, in
the principal amounts and on the dates set forth below, subject to the payments
and prepayments of principal set forth below:

<TABLE>
<CAPTION>
PRINCIPAL PRINCIPAL PRINCIPAL
AMOUNT AMOUNT PAID BALANCE TYPE OF
DATE LOANED OR PREPAID OUTSTANDING LOAN
- - - - ---- --------- ----------- ----------- -------
<S> <C> <C> <C> <C>
</TABLE>

<PAGE> 88

EXHIBIT B
to the Loan Agreement

[Form of Certificate]

[KCS ENERGY MARKETING, INC./KCS ENERGY, INC./PROLIQ, INC.]

Certificate

I, the undersigned, Secretary of [KCS ENERGY MARKETING, INC./KCS
ENERGY, INC./PROLIQ, INC.], a ________ corporation ([the "Borrower"/the
"Guarantor"]), DO HEREBY CERTIFY that:

1. This Certificate is furnished pursuant to Section 7.3[(e)/(f)] of
that certain Loan Agreement dated as of January 11, 1995 (the "Agreement")
among the Borrower, the Guarantor, [KCS Energy, Inc./Proliq, Inc.] and
Canadian Imperial Bank of Commerce (the "Lender"). Unless otherwise defined
herein, capitalized terms used in this Certificate have the meanings
assigned to those terms in the Agreement.

2. Attached hereto as Exhibit A is a copy of the Certificate of
Incorporation of [the Borrower/the Guarantor], certified by the Secretary of
State of the State of __________.

3. There have been no amendments to the Certificate of Incorporation
of [the Borrower/the Guarantor] since __________, 199_.(1)

4. Attached hereto as Exhibit B is a true and correct copy of the
by-laws of [the Borrower/the Guarantor] as in effect on the date hereof.

- - - - -------------------

(1) Insert the date of the Secretary of State's Certificate furnished pursuant
to paragraph 2.

<PAGE> 89

5. Attached hereto as Exhibit C is a true and correct copy of
resolutions duly adopted by the Board of Directors of [the Borrower/the
Guarantor] on _____________, 1994, which resolutions have not been revoked,
modified, amended or rescinded and are still in full force and effect.

6. The below-named persons have been duly elected, have duly qualified
as of and at all times since ___________, 1994(2) (to and including the date
hereof) have been officers of [the Borrower/the Guarantor], holding the
respective offices below set opposite their names, and the signatures below
set opposite their names are their genuine signatures.

Name Office Signatures
---- ------- ----------
[Title]
- - - - --------------------------------- --------------------------------
[Title]
- - - - --------------------------------- --------------------------------
[Title]
- - - - --------------------------------- --------------------------------

WITNESS my hand and the seal of [the Borrower/the Guarantor] this ___
day of ________________, 199_.

-------------------------------
Secretary

- - - - -------------------
(2) Insert the date next preceding the effective date of adoption of the
resolutions referred to in paragraph 4 above.

2
<PAGE> 90

I, the undersigned, [title] of [the Borrower/the Guarantor], DO HEREBY
CERTIFY that:

1. [Name of Secretary] is the duly elected and qualified Secretary of
[the Borrower/the Guarantor] and the signature above is [his/her] genuine
signature.

2. Each of the Loan Agreement and each other [Loan Document to which
the undersigned is a party] is in existence and is in full force and effect on
the date hereof.

3. The representations and warranties on the part of [the Borrower/the
Guarantor] contained or reaffirmed and repeated in the Loan Agreement and in
each other [Loan Document to which the undersigned is a party] are true and
correct at and as of the date hereof as though made on and as of the date
hereof.

4. To the best of my knowledge, no Portfolio Event, Event of Default or
Default has occurred and is continuing, or would result from the consummation of
the initial borrowing on this date.

WITNESS my hand on this _____ day of ____________, 199_.

-----------------------------
Authorized Signatory

<PAGE> 91

EXHIBIT C
to the Loan Agreement

[Form of Guarantor Certificate]

[KCS ENERGY, INC./PROLIQ, INC.]

Certificate

I, the undersigned, [name], the [title] of [KCS ENERGY, INC., a
Delaware corporation][PROLIQ, INC., a New Jersey corporation] (the "Guarantor"),
DO HEREBY CERTIFY that:

1. This Certificate is furnished pursuant to Section 7.7 of that
certain Loan Agreement dated as of January 11, 1995 (the "Agreement") among
KCS Energy, Marketing Inc., the Guarantor, [KCS Energy Inc/Proliq, Inc.]
(the "Co-Guarantor") and Canadian Imperial Bank of Commerce (the "Lender").
Unless otherwise defined herein, capitalized terms used in this Certificate
have the meanings assigned to those terms in the Agreement.

2. (i) the representations and warranties of each of the Borrower and
each Guarantor set forth in Section 6 of the Agreement are on the date
hereof, and will on the date of the proposed borrowing be, true and correct
as if made on and as of each such date, (ii) no Portfolio Event, Default or
Event of Default has occurred and is continuing on the date hereof or shall
have occurred and be continuing on the date of the proposed borrowing, and
(iii) after giving effect to the making of the Loans requested hereby, the
aggregate principal amount of all Loans outstanding will not exceed the
lesser of (A) the Borrowing Base and (B) the Loan Commitment.

WITNESS my hand this __ day of ____________, 199_.

----------------------------
[title]

<PAGE> 92

EXHIBIT D
to the Loan Agreement

[Form of Security Agreement]

<PAGE> 93

EXHIBIT E
to the Loan Agreement

[Form of Pledge Agreement]

<PAGE> 94

EXHIBIT F
to the Loan Agreement

[Form of Loan Request]

Canadian Imperial Bank of Commerce
425 Lexington Avenue
New York, New York 10017

Attention: [Name]
[Title]

This Loan Request is delivered to you pursuant to Section 2.3 and
Section 7.5 of the Loan Agreement dated as of January 11, 1995 (as it may be
amended, supplemented, restated or otherwise modified from time to time, the
"Agreement") among KCS Energy Marketing, Inc. (the "Borrower"), KCS Energy,
Inc., Proliq, Inc. and Canadian Imperial Bank of Commerce (the "Lender"). Unless
otherwise defined herein or the context otherwise requires, all capitalized
terms used herein will have the respective meanings assigned to them in the
Agreement.

The Borrower hereby requests that Loans be made in the aggregate
principal amount of $___________ on ___________, 199_ as [a Eurodollar Loan/an
Alternate Base Rate Loan].

The Borrower hereby affirms that (i) the representations and warranties
of the Borrower set forth in Section 6 of the Agreement are on the date hereof,
and will be on the date of the proposed borrowing, true and correct as if made
on and as of each such date, (ii) no Portfolio Event, Default or Event of
Default has occurred and is continuing on the date hereof or shall have occurred
and be continuing on the date of the proposed borrowing, and (iii) after giving
effect to the making of the Loans requested hereby, the aggregate principal
amount of all Loans outstanding will not exceed the lesser of (A) the Borrowing
Base and (B) the Loan Commitment.

The Borrower agrees that if, prior to the time that the borrowing
requested hereby is made, any matter affirmed herein shall no longer be true and
correct, it will immediately so notify the Lender. Except to the extent, if any,
that prior to the time that the borrowing requested

<PAGE> 95
hereby is made the Lender shall receive written notice to the contrary from the
Borrower each matter affirmed herein shall be deemed once again to be affirmed
as true and correct as of the date of such borrowing as if then made.

Please wire transfer the proceeds of the requested borrowing to the
account(s) of the following Persons at the financial institution(s) indicated
below:

<TABLE>
<CAPTION>
Amount to be Person to be Paid Name, Address, etc.
Transferred Name Account No. of Payee Bank
- - - - ----------- ---- ----------- -------------------
<S> <C> <C> <C>

$__________ _____________ _________ __________________
__________________
ABA #_____________
Attention: _______

$__________ _____________ _________ __________________
__________________
ABA #_____________
Attention: _______
</TABLE>

The Borrower has caused this Loan Request to be executed and delivered,
and the affirmations and warranties contained herein to be made, by their duly
authorized officers this ____ day of __________, 199_.

KCS ENERGY MARKETING, INC.

By:
-----------------------
Title:

<PAGE> 96

EXHIBIT G
to the Loan Agreement

[Form of Notice of Conversion or Continuation]

Canadian Imperial Bank of Commerce
425 Lexington Avenue
New York, New York 10017

Attention: [Name]
[Title]

This Notice of Conversion or Continuation is delivered to you pursuant
to Section 3.1(c) of the Loan Agreement dated as of January 11, 1995 (as it may
be amended, supplemented, restated or otherwise modified from time to time, the
"Agreement") among KCS Energy Marketing, Inc. (the "Borrower"), KCS Energy,
Inc., Proliq, Inc. and Canadian Imperial Bank of Commerce (the "Lender"). Unless
otherwise defined herein or the context otherwise requires, all capitalized
terms used herein will have the respective meanings assigned to them in the
Agreement.

The Borrower hereby requests that on ____________, 199_,

(1) $_________ of the currently outstanding principal amount of
the Loans originally made on __________, 199_ [and $________ of the
currently outstanding principal amount of the Loans originally made on
_________, 199_],

(2) all currently being maintained as
[Alternate Base Rate Loans/Eurodollar Loans],

(3) be [converted into/continued as]
[Alternate Base Rate Loans/Eurodollar Loans].

The Borrower hereby certifies that (i) the representations and
warranties of the Borrower set forth in Section 6 of the Agreement are on the
date hereof, and will be on the date of the proposed [conversion/continuation],
true and correct as if made on and as of such dates, and (ii) no Portfolio
Event, Default or Event of Default has occurred and is continuing on the date
hereof or shall have occurred and be continuing on the date of the proposed
[conversion/continuation].

<PAGE> 97

The Borrower agrees that if, prior to the time that the
[conversion/continuation] requested hereby is made, any matter certified to
herein shall no longer be true and correct, it will immediately so notify the
Lender. Except to the extent, if any, that prior to the time that the
[conversion/continuation] requested hereby is made the Lender shall receive
written notice to the contrary from the Borrower, each matter certified to
herein shall be deemed once again to be certified as true and correct as of the
date of such [conversion/continuation] as if then made.

The Borrower has caused this Notice of Conversion or Continuation to be
executed and delivered, and the certifications and warranties contained herein
to be made, by their duly authorized officers this ____ day of __________, 199_.

KCS ENERGY MARKETING, INC.

By:
-----------------------------
Title:

2
<PAGE> 98

EXHIBIT H
to the Loan Agreement

[FORM OF RECEIVABLES ACTIVITY REPORT]

<PAGE> 1
Exhibit 10.4
===============================================================================

SECURITY AGREEMENT

Dated as of January 11, 1995

among

KCS ENERGY MARKETING, INC.,

KCS ENERGY, INC.,

and

CANADIAN IMPERIAL BANK OF COMMERCE

===============================================================================

<PAGE> 2

SECURITY AGREEMENT

TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I Definitions .................................... 1
Section 1.1 Definitions ............................... 1

ARTICLE II Obligations Secured ............................ 2
Section 2.1 Obligations Secured Hereby ................ 2

ARTICLE III Representations and Warranties; Covenants ...... 3
Section 3.1 Representations and Warranties ............ 3
Section 3.2 Covenants ................................. 4
Section 3.3 Indemnity ................................. 8

ARTICLE IV Assigned Collateral ............................ 9
Section 4.1 Assignment of Assigned Collateral and
Agreements ............................... 9
Section 4.2 Delivery of the Assigned Collateral ....... 10
Section 4.3 Application of Assigned Collateral ........ 10
Section 4.4 Location of Records ....................... 10
Section 4.5 Obligations Absolute; Enforceability by
the Lender ............................... 10

ARTICLE V Default ........................................ 11
Section 5.1 Rights of the Lender upon a Portfolio
Event or an Event of Default ............. 11

ARTICLE VI Amendments, Modifications, Waivers and
Consents ..................................... 13
Section 6.1 Execution of Amendments, etc .............. 13

ARTICLE VII Miscellaneous .................................. 14
Section 7.1 Further Assurances ........................ 14
Section 7.2 No Waiver; Cumulative Remedies ............ 14
Section 7.3 Notices, etc. ............................. 14
Section 7.4 Costs and Expenses, etc. .................. 16
Section 7.5 Lender Appointed Attorney-in-Fact ......... 17
Section 7.6 Termination ............................... 17
Section 7.7 Governing Law ............................. 18
Section 7.8 Severability of Provisions ................ 18
Section 7.9 Headings .................................. 18
Section 7.10 Execution in Counterparts ................. 18
Section 7.11 Reinstatement ............................. 18
Section 7.12 Successors and Assigns .................... 19
</TABLE>

<PAGE> 3

Schedule 1.1 - List of Lock-Boxes

Schedule 3.1(h) - Locations of the Borrower

Exhibit 1.1-L - Form of Lock-Box Agreement

<PAGE> 4

SECURITY AGREEMENT

SECURITY AGREEMENT dated as of January 11, 1995 among KCS ENERGY
MARKETING, INC., a New Jersey corporation (the "Borrower"), KCS Energy, Inc., a
Delaware Corporation (the "Guarantor") and CANADIAN IMPERIAL BANK OF COMMERCE
(the "Lender") under the Loan Agreement (as hereinafter defined).

WITNESSETH:

WHEREAS, the Borrower, the Guarantor, Proliq, Inc., a New Jersey
corporation ("Proliq"), and the Lender have entered into a Loan Agreement dated
as of January 11, 1995 (as the same from time to time may be extended, amended,
supplemented, waived or modified and in effect, the "Loan Agreement") providing,
among other things, for the commitment of the Lender to make Loans to the
Borrower on the terms and conditions set forth in the Loan Agreement and for the
Guarantor to guarantee, jointly and severally with Proliq, the obligations of
the Borrower under the Loan Agreement; and

NOW, THEREFORE, in consideration of the premises and in order to induce
the Lender to make Loans to the Borrower as provided in the Loan Agreement, the
Borrower and the Guarantor agrees with the Lender as follows:

ARTICLE I

Definitions

Section 1.1 Definitions. As used in this Agreement and unless the
context requires a different meaning, capitalized terms used herein and not
otherwise defined have the meanings assigned to such terms in the Loan
Agreement, and the following terms shall have the following meanings:

Collection: any amount paid by an Obligor or any other party with
respect to a Receivable.

<PAGE> 5

ARTICLE II

Obligations Secured

Section 2.1 Obligations Secured Hereby. This Agreement is made to
provide for and secure repayment of the following indebtedness and liabilities
of the Borrower (such indebtedness and liabilities being herein called the
"Secured Obligations") in the order of priority indicated:

First, the repayment of all amounts advanced or expended by the
Lender for the account of the Borrower hereunder, the payment of all
costs and expenses at any time and from time to time incurred by the
Lender in connection with the enforcement of this Agreement (including,
without limitation, the fees and expenses of counsel employed by the
Lender in connection therewith), the payment of all reasonable costs
and expenses at any time and from time to time incurred by the Lender
in connection with the administration of this Agreement (including,
without limitation, the reasonable fees and expenses of counsel
employed by the Lender in connection therewith) and the payment of all
indemnities and other amounts at any time and from time to time payable
hereunder to the Lender by the Borrower, and

Second, the payment of the Loans and interest with respect
thereto, and

Third, the repayment of all other amounts at any time and from
time to time owing by the Borrower to the Lender under or in connection
with the Loan Agreement or any other Loan Document, and the payment of
all costs and expenses at any time and from time to time incurred by
the Lender in connection with the enforcement of or preservation of any
right under the Loan Agreement or any such other Loan Document
(including, without limitation, the fees and expenses of counsel
employed by the Lender in connection therewith), and the payment of all
reasonable costs and expenses at any time and from time to time
incurred by the Lender in connection with the administration of the
Loan Agreement or any such other Loan Document (including, without
limitation, the reasonable fees and expenses of counsel employed by the
Lender in

2
<PAGE> 6

connection therewith) and any other costs and expenses payable by the
Borrower under or in connection with the Loan Agreement or any such
other Loan Document, and the payment of all indemnities and other
amounts at any time and from time to time payable thereunder or in
connection therewith.

ARTICLE III

Representations and Warranties; Covenants

Section 3.1 Representations and Warranties. (a) Each of the Borrower
and the Guarantor reaffirms and repeats its representations and warranties
contained in the Loan Agreement and agrees that the Lender may rely on such
representations and warranties as though set forth herein in full.

(b) The Borrower and the Guarantor jointly and severally represent and
warrant to the Lender on the date hereof, and on each date prior to the
termination of this Agreement in accordance with the provisions of Section 7.6
hereof, that:

(i) Fully executed Uniform Commercial Code financing statements
(including fixture filings, as applicable) or other appropriate filings
containing a description of the Assigned Collateral have been filed of
record in every governmental, municipal or other office in every
jurisdiction in which filings are necessary to publish notice of and
protect the validity of and to establish a valid and perfected security
interest in favor of the Lender in respect of the Assigned Collateral,
and no further or subsequent filing, refiling, recording, rerecording,
registration or reregistration is necessary in any such jurisdiction,
except as provided under applicable law with respect to the filing of
continuation statements.

(ii) The security interest in favor of the Lender constitutes a
valid, legal and perfected first priority security interest in all the
Assigned Collateral securing the payment and performance of the Secured
Obligations.

3
<PAGE> 7

(iii) (A) No financing statement listing the Borrower or any Trade
Name of the Borrower as debtor (other than any which may have been
filed for the benefit of the Lender) covering any of the Assigned
Collateral is on file in any public office; and (B) the Borrower is and
will be the lawful owner of, and has and will have good and marketable
title to, all Assigned Collateral, free and clear of all Liens except
for the Lien and security interest granted pursuant hereto in favor of
the Lender.

(iv) The Borrower has not previously created any security interest
in the Assigned Collateral or any part thereof.

(v) This Agreement has been duly authorized, executed and
delivered by the Borrower and the Guarantor and constitutes a legal,
valid and binding obligation of the Borrower and the Guarantor,
enforceable against the Borrower and the Guarantor in accordance with
its terms.

(vi) The Borrower has valid rights in and good title to the
Assigned Collateral and has full corporate power and authority to grant
to the Lender the security interest in the Assigned Collateral pursuant
hereto and to execute, deliver and perform its obligations in
accordance with the terms of this Agreement, without the consent or
approval of any other Person.

(vii) Schedule 3.1(h) hereto sets forth (A) the location of the
chief executive office of the Borrower, (B) all other places of
business of the Borrower, and (C) all Trade Names used by the Borrower
and the jurisdictions in which such Trade Names are so used.

Section 3.2 Covenants. (a) Each of the Borrower and the Guarantor shall
comply fully with the provisions of the Loan Agreement and this Agreement and
the other Loan Documents to which it is a party and punctually perform its
obligations hereunder and thereunder.

(b) Each of the Borrower and the Guarantor covenants and agrees with
the Lender that from and after the

4
<PAGE> 8

date hereof and so long as this Agreement shall remain in effect that:

(i) The Borrower shall comply, in all material respects, with all
Applicable Laws, and directions of any Governmental Authority
applicable to the Assigned Collateral or any part thereof.

(ii) The Borrower will not create, permit or suffer to exist, and
will defend the Assigned Collateral against, and take such other
actions as are necessary to remove, any Lien, claim or right in, to or
on the Assigned Collateral, and will defend the right, title and
interest of the Lender in and to the Assigned Collateral against the
claims and demands of all Persons whomsoever, other than the Liens
created hereby.

(iii) The Borrower will take such further action as the Lender may
deem necessary or appropriate from time to time to protect, perfect and
maintain the Lender's security interest in the Assigned Collateral and
the priority thereof and to deliver promptly to the Lender all
originals of the Assigned Collateral or proceeds thereof consisting of
chattel paper or instruments. Without limiting the foregoing, the
Borrower (A) agrees to cause the recordation of any necessary
assignments in the appropriate recording office of each relevant
jurisdiction, and (B) agrees that in the event the Assigned Collateral
is ever evidenced by an "instrument" or "chattel paper" as each such
term is defined in Article 9 of the Uniform Commercial Code as in
effect in the State of New York or, to the extent applicable, such
other jurisdiction (hereinafter referred to as the "UCC"), the Borrower
shall forthwith deliver, or will cause to be delivered, such
instruments or chattel paper, bearing all necessary endorsements to the
Lender, in a manner satisfactory to the Lender.

(iv) The Borrower shall keep and maintain at its own cost and
expense satisfactory and complete records of the Assigned Collateral
and provide the Lender with such records and such reports and
information relating to the Assigned Collateral as the Lender may
reasonably request from time to time.

5
<PAGE> 9

(v) The Borrower shall not surrender or lose possession of, sell,
encumber, or otherwise dispose of or transfer, any Assigned Collateral
or right or interest therein, other than to the Lender.

(vi) The Borrower shall, at all times, upon the reasonable request
of the Lender, account fully for and promptly deliver to the Lender, in
the form received, all Assigned Collateral or proceeds thereof received
by the Borrower, endorsed to the Lender as appropriate and accompanied
by such assignments and powers, duly executed, as the Lender shall
reasonably request, and until so delivered, shall keep all Assigned
Collateral separate from all other property of the Borrower and
identified on the records of the Borrower as the property pledged to
the Lender under this Agreement.

(vii) The Borrower will allow the Lender and such representatives as
the Lender may reasonably designate, at reasonable times during normal
business hours and as often as reasonably requested upon at least 24
hours notice to the Borrower, to inspect the Assigned Collateral, all
records related thereto (and to make extracts and copies from such
records) and the premises upon which any of the Assigned Collateral is
located, to discuss the Borrower's affairs with the officers of the
Borrower and the Borrower's independent accountants and to verify under
such procedures as the Lender shall deem appropriate the validity,
amount, quality, quantity, value and condition of, or any other matter
relating to, the Assigned Collateral, including, in the case of
accounts receivable or Assigned Collateral in the possession of any
third person, by contacting the related account debtors or the third
person possessing such Assigned Collateral for the purpose of making
such a verification.

(viii) The Borrower agrees to promptly notify the Lender of any
change (A) in its corporate name or in any trade name used to identify
it in the conduct of its business or in the ownership of its properties
or (B) in the location of its chief executive office, its principal
place of business,

6
<PAGE> 10
any office in which it maintains records relating to Assigned
Collateral owned by it or the offices or facilities at which Assigned
Collateral owned by it is located (including the establishment of any
such new office or facility). The Borrower agrees not to effect or
permit any change referred to in the preceding sentence unless all
filings under the Uniform Commercial Code or otherwise which are
required in order for the Lender to continue at all times following
such change to have a valid and perfected first priority security
interest in all the Assigned Collateral have been made. The Borrower
agrees promptly to notify the Lender if any material portion of the
Assigned Collateral is damaged or destroyed.

(ix) The Borrower will, at the request of the Lender, place on all
chattel paper and instruments, if any, which are part of the Assigned
Collateral, and each of its records pertaining thereto, a legend, in
form and content satisfactory to the Lender, indicating that such
Assigned Collateral has been assigned to the Lender.

(x) The Borrower will manage or cause to be managed its assets
constituting the Assigned Collateral pledged under this Agreement in
accordance with its normal business practices and in the same manner as
it would if the Assigned Collateral was not assigned to the Lender
under this Agreement. Neither the Borrower nor any agent of the
Borrower may, without the prior written consent of the Lender, make any
modification or take any action with respect to any Assigned Collateral
that could have a material adverse effect on the Lender's rights as
secured party under this Agreement.

(xi) The Borrower will pay (or require to be paid), prior to their
becoming delinquent, all taxes, assessments, insurance premiums,
charges, encumbrances and liens now or hereafter imposed upon or
affecting any Assigned Collateral.

(xii) From and after the date of this Agreement, the Borrower
agrees to notify and direct promptly each Obligor to make all payments
on Receivables to a Lock-Box. The Borrower shall

7
<PAGE> 11

cause each Obligor to make all payments with respect to accounts and
inventory directly to such Lock-Box. In the event that the Borrower or
any of its subsidiaries or affiliates receives a payment on account of
a Receivable, the Borrower shall, or shall cause such subsidiary or
affiliate to, deposit such payment in a Lock-Box no later than the
Business Day following the day on which such payment is received by the
Borrower or such subsidiary or affiliate.

(xiii) The Borrower shall not, and shall not permit a Lock-Box Bank
to, amend, supplement, modify or waive any term in any Lock-Box
Agreement, nor shall the Borrower request the waiver of any provision
thereof, with respect to the disposition of Collections deposited into
a Lock-Box without the prior written consent of the Lender, which
consent shall not be unreasonably withheld or delayed. The Borrower
shall not add or terminate any bank as a Lock-Box Bank, or make any
change in its instructions to Obligors regarding payments to be made to
the Borrower or payments to be made to any Lock-Box Bank, unless the
Lender shall have received notice of such addition, termination or
change and, with respect to the addition of any Lock-Box Bank, a
Lock-Box Agreement as the case may be, executed by the Borrower, the
Lender and such Lock-Box Bank shall have been delivered to the Lender.

Section 3.3 Indemnity. The Borrower hereby agrees to indemnify the
Lender and hold the Lender harmless with respect to any and all losses, costs,
claims, damages, penalties, causes of action, suits, judgments, liabilities and
expenses (including, without limitation, attorneys' fees and expenses) incurred
or suffered by the Lender arising out of or resulting from (i) the failure to be
true or to continue to be true any of the representations or warranties, or the
failure of the Borrower to comply with any of the covenants, in this Article III
or elsewhere in this Agreement and (ii) the assignment and security interest
granted hereby, including, without limitation, the costs, expenses and
disbursements (including attorneys' fees and expenses) incurred or suffered by
the Lender in enforcing, preserving or collecting under the security interest
granted hereby. The obligations of the Borrower under this Section 3.3 shall
survive the termination of this Agreement and the

8
<PAGE> 12

discharge of the Secured Obligations hereunder and shall also survive the
termination of the Loan Agreement.

ARTICLE IV

Assigned Collateral

Section 4.1 Assignment of Assigned Collateral and Agreements. In order
to secure and to provide for the repayment of the Secured Obligations, the
Borrower hereby assigns, conveys, transfers, delivers and sets over unto the
Lender, and hereby grants to the Lender, a security interest in all of the
Borrower's right, title and interest in the following assets (whether now
existing or hereafter arising) which are from time to time subjected to the Lien
of this Agreement by delivery thereof to the Lender or otherwise (all of the
following indicated in (i) through (vii) being referred to as the "Assigned
Collateral"):

(i) all Receivables, including, without limitation, any interest
of the Borrower in any letter of credit, guarantee, claim, security
interest or other security held by or granted to the Borrower to secure
payment by an Obligor (whether now existing or hereafter arising);

(ii) all chattel paper (as such term is defined in Section 9-105(b)
of the UCC) and instruments (as such term is defined in Section
9-105(i) of the UCC) relating to the right to payment for goods sold or
leased or for services rendered, whether or not it has been earned by
performance;

(iii) all contracts relating to the accounts or chattel paper and
all monies due and to become due thereunder;

(iv) all instruments, files, records, ledger sheets and documents
covering or relating to any of the foregoing;

(v) any and all proceeds of or distributions with respect to the
foregoing, including, without limitation, any guarantees thereon or
security interests taken with respect thereto and any contractual or
other rights arising from any disposition of the foregoing;

9
<PAGE> 13

(vi) all Lock-Boxes of the Borrower set forth on Schedule 1.1; and

(vii) all rights and privileges of the Borrower with respect to
the foregoing.

Section 4.2 Delivery of the Assigned Collateral. The Borrower will not
take any action to cause the Assigned Collateral delivered to the Lender
pursuant to this Agreement to be removed from the possession of the Lender, to
revert to the Borrower or any interest therein to be assigned to any other
Person.

Section 4.3 Application of Assigned Collateral. Upon the occurrence of
a Portfolio Event or an Event of Default, the Lender may apply the Assigned
Collateral and the proceeds thereof to the payment or repayment in full of all
accrued and unpaid Secured Obligations, in the order of priority specified in
Section 2.1 hereof.

Section 4.4 Location of Records. The Borrower hereby covenants and
agrees that its chief place of business and chief executive office, and the
place where its records pertaining to the Assigned Collateral will be kept,
shall at all times be located in the County of Harris, the State of Texas.

Section 4.5 Obligations Absolute; Enforceability by the Lender. Each of
the Borrower and the Guarantor hereby acknowledges that its obligations under
this Agreement are and shall be absolute and unconditional under any and all
circumstances, including, without limitation, the following circumstances: (a)
any amendment, modification, supplement or waiver of or to any provision of the
Loan Agreement, this Agreement or any other Loan Document, or the illegality,
invalidity, irregularity or unenforceability of the Loan Agreement, this
Agreement, any other Loan Document, or any Loans made to the Borrower, or (b)
the breach or falsity (whether or not material) of any representation or
warranty on the part of the Lender contained or reaffirmed and repeated in this
Agreement, the Loan Agreement, any other Loan Document, or otherwise made to the
Lender under or in connection with any of the foregoing, or (c) any failure on
the part of the Lender to perform or observe any term, covenant or agreement on
its part to be performed or observed under the Loan Agreement, this Agreement,
any other Loan Document or any other

10
<PAGE> 14

agreement, instrument or document delivered in connection with any of the
foregoing, or (d) the existence of any setoff, counterclaim, recoupment, defense
or other right or claim which the Borrower or the Guarantor may at any time have
or have had against the Lender, or (e) the dissolution, bankruptcy, insolvency
or reorganization of the Borrower or the Guarantor or the appointment of a
receiver, trustee, custodian or liquidator for any of the Borrower's or the
Guarantor's assets, including without limitation, the Borrower's interest in the
Assigned Collateral, or (f) the existence of any law, rule, regulation, order,
writ, judgment, decree, determination or award purporting in any manner to
affect the Loan Agreement, this Agreement, any other Loan Document or any other
agreement, instrument or document executed and delivered pursuant to or in
connection with any of the foregoing, the Loans made to the Borrower, or any
obligation of the Borrower under the Loan Agreement, this Agreement, any other
Loan Document or any related document, or (g) any other circumstances whatsoever
which would otherwise constitute an excuse for nonperformance by the Borrower of
its obligations hereunder, whether similar or dissimilar to any of the
circumstances specified in clauses (a) through (f) above.

ARTICLE V

Default

Section 5.1 Rights of the Lender upon a Portfolio Event or an Event of
Default. (a) Upon the occurrence of a Portfolio Event (except for (viii) below)
or an Event of Default, the Lender shall have the right, as the true and lawful
agent of the Borrower, with power of substitution for the Borrower and in the
Borrower's name, the Lender's name or otherwise, for the use and benefit of the
Lender (i) to receive, endorse, assign and/or deliver any and all notes,
acceptances, checks, drafts, money orders or other evidences of payment relating
to the Assigned Collateral or any part thereof; (ii) to demand, collect, receive
payment of, give receipt for and give discharges and releases of all or any of,
the Assigned Collateral; (iii) to sign the name of the Borrower on any invoice
or bill of lading relating to any of the Assigned Collateral; (iv) to send
verifications of Receivables to any Obligor thereon; (v) to commence and
prosecute any and all suits, actions or proceedings at law or in equity in any
court of competent jurisdiction to collect or otherwise realize on all or any of
the Assigned Collateral or to enforce any rights in respect of any

11
<PAGE> 15

Assigned Collateral; (vi) to settle, compromise, compound, adjust or defend any
actions, suits or proceedings relating to all or any of the Assigned Collateral;
(vii) to notify, or to require the Borrower to notify, each Obligor to make
payment in respect of the Receivables directly to the Lender; and (viii) to use,
sell, assign, transfer, pledge, make any agreement with respect to or otherwise
deal with all or any of the Assigned Collateral, and to do all other acts and
things necessary to carry out the purposes of this Agreement, as fully and
completely as though the Lender were the absolute owner of the Assigned
Collateral for all purposes; provided, however, that nothing herein contained
shall be construed as requiring or obligating the Lender to make any commitment
or to make any inquiry as to the nature or sufficiency of any payment received
by the Lender, or to present or file any claim or notice, or to take any action
with respect to the Assigned Collateral or any part thereof or the moneys due or
to become due in respect thereof or any property covered thereby, and no action
taken or omitted to be taken by the Lender with respect to the Assigned
Collateral or any part thereof shall give rise to any defense, counterclaim or
offset in favor of the Borrower or to any claim or action against the Lender. It
is understood and agreed that the appointment of the Lender as the agent of the
Borrower for the purposes set forth above is coupled with an interest and is
irrevocable. The provisions of this Section 5.1 shall in no event relieve the
Borrower of any of its obligations hereunder or under any of the other Loan
Documents to which it is a party with respect to the Assigned Collateral or any
part thereof or impose any obligation on the Lender to proceed in any particular
manner with respect to the Assigned Collateral or any part thereof, or in any
way limit the exercise by the Lender, of any other or further right which it may
have on the date of this Agreement or hereafter, whether hereunder, under the
Loan Agreement or by law or otherwise.

(b) Upon the occurrence of a Portfolio Event or an Event of Default,
the Lender shall have the right, as the true and lawful agent of the Borrower
and in the Borrower's name, the Lender's name or otherwise, for the use and
benefit of the Lender, to take control of the Lock-Boxes (by delivery to the
Lock-Box Banks of notices in substantially the forms attached to the Lock-Box
Agreement).

(c) Upon the occurrence of an Event of Default, the Borrower agrees
that the Lender shall have the right, at the same or different times, with or
without legal process and

12
<PAGE> 16

with or without previous notice or demand for performance, to take possession of
the Assigned Collateral and without liability for trespass to enter any premises
where the Assigned Collateral may be located for the purpose of taking
possession of or removing the Assigned Collateral and, generally, to exercise
any and all rights afforded to a secured party under the Uniform Commercial Code
or other Applicable Law, including the liquidation or other disposition of the
Assigned Collateral or any part thereof.

(d) Upon the occurrence of an a Portfolio Event or Event of Default,
the Borrower shall, upon the request of the Lender, transfer to the Lender all
records, correspondence and documents (including computer software) requested by
the Lender and to permit the Lender to have access to, and to copy, all software
used by the Lender in the collection, administration or monitoring of the
Receivables. The Borrower shall, in connection with the foregoing, transfer to
the Lender all of the Borrower's rights in and to each license with respect to
such software.

ARTICLE VI

Amendments, Modifications,
Waivers and Consents

Section 6.1 Execution of Amendments, etc. No amendment, modification,
supplement, termination or waiver of or to any provision of this Agreement, nor
any consent to any departure by the Borrower or the Guarantor from any provision
of this Agreement, shall be effective unless the same shall be in writing and
signed on behalf of the Lender, the Borrower and the Guarantor. Any waiver of
any provision of this Agreement, and any consent to any departure by the
Borrower or the Guarantor from the terms of any provision of this Agreement,
shall be effective only in the specific instance and for the specific purpose
for which given. No notice to or demand upon the Borrower or the Guarantor in
any instance hereunder shall entitle the Borrower or the Guarantor to any other
or further notice or demand in similar or other circumstances.

13
<PAGE> 17

ARTICLE VII

Miscellaneous

Section 7.1 Further Assurances. Each of the Borrower and the Guarantor
agrees that it will join with the Lender in executing and, at its own expense,
recording, filing and refiling, or permit the Lender to record, file and refile,
such assignments, financing statements, continuation statements and other
documents (including this Agreement) in such offices as the Lender may deem
necessary or appropriate and wherever required or permitted by law in order to
perfect and preserve the rights and interests granted to the Lender hereby, and
hereby authorizes the Lender to file financing statements and amendments thereto
and continuation statements relative to all or any part thereof without the
signature of the Borrower where permitted by law, and agrees to do such further
acts and things, and to execute and deliver to the Lender such additional
assignments, agreements, powers and instruments, as the Lender reasonably
determines to be necessary to carry into effect the purposes of this Agreement
or to better assure and confirm unto the Lender its rights, powers and remedies
hereunder. Each of the Borrower and the Guarantor further agrees that it will
deliver or cause to be delivered to the Lender all instruments, certificates or
registrations of transfer as the Lender may deem necessary or appropriate and
wherever required or permitted by law, in order to perfect and preserve the
rights and interests granted to the Lender hereby in that Assigned Collateral
which the Borrower must possess to have a valid and perfected first lien
security interest.

Section 7.2 No Waiver; Cumulative Remedies. No failure on the part of
the Lender to exercise, and no delay on the part of the Lender in exercising any
right, power or remedy hereunder shall operate as a waiver thereof, nor shall
any single or partial exercise of any such right, power or remedy by the Lender
preclude any other or further exercise thereof or the exercise of any other
right, power or remedy. All remedies hereunder are cumulative and are not
exclusive of any other remedies that may be available to the Lender, whether at
law, in equity or otherwise.

14
<PAGE> 18

permitted to be given under this Agreement shall be in writing and shall be
personally delivered or sent by registered, certified or express mail, postage
prepaid, return receipt requested, or by, facsimile or telegram (with messenger
delivery specified in the case of a telegram), and shall be deemed to be given
for purposes of this Agreement on the date on which such writing is delivered or
sent to the intended recipient thereof in accordance with the provisions of this
Section 7.3 (except that any notice sent by registered or certified mail shall
be deemed to have been given on the fifth Business Day after such notice is
deposited for delivery in the United States mail). Unless otherwise specified in
a notice sent or delivered in accordance with the foregoing provisions of this
Section 7.3, notices, demands, instructions and other communications in writing
shall be given to or made upon the respective parties hereto at their respective
addresses (or to their respective facsimile numbers) indicated below, and, in
the case of telephonic instructions or notices, by calling the telephone number
or numbers indicated for such party below:

(a) with respect to the Borrower:

KCS Energy Marketing, Inc.
379 Thornall Street
Edison, New Jersey 08837
Attention: Kathryn M. Kinnamon
Assistant Treasurer
Telephone: (908) 632-1770
Facsimile: (908) 603-8960

with a copy to:

Orloff, Lowenbach, Stifelman & Siegel, P.A.
101 Eisenhower Parkway
Roseland, New Jersey 07068
Attention: Ralph M. Lowenbach, Esq.
Telephone: (201) 622-6200
Facsimile: (201) 622-3073

15
<PAGE> 19

(b) with respect to the Guarantor:

KCS Energy, Inc.
379 Thornall Street
Edison, New Jersey 08837
Attention: Henry A. Jurand
Vice President, Treasurer
and Secretary
Telephone: (908) 632-1770
Facsimile: (908) 603-8960

with a copy to:

Orloff, Lowenbach, Stifelman & Siegel, P.A.
101 Eisenhower Parkway
Roseland, New Jersey 07068
Attention: Ralph M. Lowenbach, Esq.
Telephone: (201) 622-6200
Facsimile: (201) 622-3073

Canadian Imperial Bank of Commerce
425 Lexington Avenue
New York, New York 10017
Attention: Asset Securitization Group
Telephone: (212) 856-3850
Facsimile: (212) 856-3643

Any party may designate a different or additional address for the
delivery of notices by providing notice thereof to the other party. Except as
provided to the contrary above, all notices, demands, and other communications
shall be effective upon personal delivery or upon the date of receipt by the
addressee as shown on the return receipt. Rejection or other refusal to accept
notices, demands, or other communications which are rejected or acceptance of
which is refused shall be deemed to be effective upon the date on which the same
were rejected or refused.

Section 7.4 Costs and Expenses, etc. The Borrower hereby agrees to
reimburse the Lender, on demand, for all costs and expenses incurred by the
Lender in connection with the administration and enforcement of this Agreement
and agrees to indemnify and hold harmless the Lender from and

16
<PAGE> 20

against any and all losses, costs, claims, damages, penalties, causes of action,
suits, judgments, liabilities and expenses (including, without limitation,
attorneys' fees and expenses) incurred by the Lender hereunder or in connection
herewith, unless such liability shall be due to willful misconduct or gross
negligence on the part of the Lender. If the Borrower or the Guarantor shall
fail to do any act or thing which it has covenanted to do hereunder or any
representation or warranty on its part contained herein or repeated and
reaffirmed herein shall be breached, the Lender may (but shall not be obligated
to) do the same or cause it to be done or remedy any such breach, and may expend
its funds for such purpose. Any and all amounts so expended by the Lender shall
be repayable to it by the Borrower upon the Lender's demand therefor. The
obligations of the Borrower under this Section 7.4 shall survive the termination
of this Agreement, the resignation of the Lender, and the discharge of the other
obligations of the Borrower and the Guarantor hereunder and shall also survive
the termination of the Loan Agreement.

Section 7.5 Lender Appointed Attorney-in-Fact. Until all Secured
Obligations are paid, the Borrower hereby appoints the Lender its
attorney-in-fact, with full power of substitution, for the purpose of taking
such action and executing agreements, instruments and other documents, in the
name of the Borrower, as the Lender may deem necessary or advisable to
accomplish the purposes hereof, which appointment is coupled with an interest
and is irrevocable; provided, however, that the Lender shall not take any of the
foregoing actions until the occurrence of an Event of Default.

Section 7.6 Termination. Subject to Section 7.11, this Agreement and
the assignments, pledges and security interests created or granted hereby shall
terminate when (a) all Secured Obligations shall have been fully paid and
satisfied, (b) the commitments and obligations of the Lender under the Loan
Agreement and related documents have terminated, (c) all obligations of the
Borrower, Proliq and the Guarantor due and owing under or in respect of the Loan
Agreement shall have been satisfied and fully paid, and (d) the Lender receives
a certificate from the Borrower, Proliq and the Guarantor certifying as to the
matters in clauses (a) through (c) above, at which time the Lender shall
reassign, without recourse upon, or any warranty whatsoever by, the Lender, and
deliver to the Borrower, all Assigned Collateral and documents then in the
custody or

17
<PAGE> 21
possession of the Lender and, if requested by the Borrower, shall execute and
deliver to the Borrower for recording or filing in each office in which any
assignment or financing statement relative to the Assigned Collateral or the
agreements relating thereto or any part thereof, shall have been filed or
recorded, a termination statement or release under Applicable Law releasing the
Lender's interest therein, and such other documents and instruments as the
Borrower may reasonably request, all without recourse upon or warranty
whatsoever by, the Lender, and at the cost and expense of the Borrower.

Section 7.7 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.

Section 7.8 Severability of Provisions. Any provision of this
Agreement which is prohibited or unenforceable in any jurisdiction shall, as to
such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof or
affecting the validity or enforceability of such provision in any other
jurisdiction.

Section 7.9 Headings. Article and Section headings used in this
Agreement are for convenience of reference only and shall not affect the
construction of this Agreement.

Section 7.10 Execution in Counterparts. This Agreement may be executed
in any number of counterparts and by different parties hereto on separate
counterparts, each of which counterparts, when so executed and delivered, shall
be deemed to be an original and all of which counterparts, when taken together,
shall constitute one and the same Agreement.

Section 7.11 Reinstatement. This Agreement shall continue to be
effective, or be reinstated, as the case may be, if at any time any amount
received by the Lender in respect of the Assigned Collateral is rescinded or
must otherwise be restored or returned by the Lender upon the insolvency,
bankruptcy, dissolution, liquidation or reorganization of the Borrower or the
appointment of an intervenor or conservator of, or trustee or similar officer
for, the Borrower or any substantial part of its respective properties, or
otherwise, all as though such payment had not been made.

18
<PAGE> 22

Section 7.12 Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of the Borrower, the Guarantor and the Lender and
their respective successors and assigns except that the Borrower may not assign
or transfer to any other Person or have assumed by any other Person (by
operation of law or otherwise) all or any part of its rights or obligations
hereunder without the prior written consent of the Lender. Each of the Borrower
and the Guarantor expressly agree that this Agreement shall be for the benefit
of the Lender and their respective successors and assigns. This Agreement shall
not be construed so as to confer any right or benefit upon any Person other than
the parties to this Agreement and the parties to the Loan Agreement and each of
their respective successors and assigns.

19
<PAGE> 23

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized, as of the date
first above written.

KCS ENERGY MARKETING, INC.

BY
----------------------------------
Authorized Signatory

KCS ENERGY, INC.

By
----------------------------------
Authorized Signatory

CANADIAN IMPERIAL BANK OF COMMERCE,
as Lender

By
----------------------------------
Authorized Signatory

20
<PAGE> 24

Schedule 1.1
to the
Security Agreement

List of Lock-Boxes

Address of Lock-Box
Lock-Box Address Bank and Account No.

1. KCS Energy Marketing, Inc. First Fidelity Bank, N.A.
P.O. Box 18032 570 Broad Street, A57005
Newark, New Jersey 07191 Newark, New Jersey 07102
Account No. 81305-187-33

2. KCS Energy Management First Fidelity Bank, N.A.
Services, Inc. 570 Broad Street, A57005
P.O. Box 18309 Newark, New Jersey 07102
Newark, New Jersey 07191 Account No. 300-027346-0

<PAGE> 25

Schedule 3.1(h)
to the
Security Agreement

Locations and Trade Names of the Borrower

Corporate Headquarters

1800 West Loop South
14th Floor
Houston, Texas 77027

Corporate Offices

379 Thornall Street
Edison, New Jersey 08837

Suite 210, Cathedral Park Tower
37 Franklin Street
Buffalo, New York 14202

14 Ruth Place
Belle Vernon, Pennsylvania 15012

Trade Names

The Borrower is registered to use the name "KCS Energy Management Services,
Inc." for the transaction of business in the State of New Jersey.

<PAGE> 26

EXHIBIT 1.1-L
to the
Security Agreement

[Form of Lock-Box Agreement]

__________, 19__

[Name of Lock-Box Bank]
[Address]

Gentlemen:

We refer to lock-box account[s] no.[s]. __________ maintained with you
(the "Lock-Box Account[s]") by us, KCS Energy Marketing, Inc. ("KCS"). We have
entered into certain agreements with Canadian Imperial Bank of Commerce
("CIBC"), which require the execution and delivery of this agreement by you.

By signing this agreement, you agree that on and after delivery to you
of a letter in the form of Attachment A hereto (the "Letter"), the Lock-Box
Account[s] shall, on the terms provided herein, be maintained by you for the
benefit of, and the amounts from time to time therein held by you as agent for,
CIBC under the Security Agreement dated as of January 11, 1995 among KCS Energy,
Inc. (the "Guarantor"), KCS and CIBC, as Lender (the "Lender") under the Loan
Agreement dated as of January 11, 1995 among the Guarantor, KCS, Proliq, Inc and
the Lender. Until the time of delivery of the Letter, the Lock-Box Account[s]
are to be processed in accordance with the standard procedures currently in
effect. All customary service charges and fees with respect to the Lock-Box
Account[s] shall be payable by KCS as currently arranged or, after delivery of
the Letter to you, by debit to the Lock-Box Account[s] as described below.

Upon delivery to you of the Letter, the Lock-Box Account[s] shall be
under the sole dominion and control of the Lender and all instructions
thereafter regarding the Lock-Box Account shall be delivered only by the Lender.

Instructions from the Lender may include, but shall not be limited to:

<PAGE> 27

(a) Notice of the establishment of a concentration account into
which all moneys collected in the Lock-Box Account[s] shall
thereafter be transferred. Such transfers will be in accordance
with your availability of funds procedures applicable to KCS and
will encompass all collected deposits less any deductions for
returned items. Transfers between the Lock-Box Account[s] and the
concentration account may be carried out using either Fed wire
transfers or ACH (Automated Clearing House) entries.

(b) A requirement that duplicate monthly bank statements for the
Lock-Box Account[s] and the concentration account be mailed
directly to an address specified by the Lender.

By signing this agreement, you agree that you shall not make any
charges or debits to the Lock-Box Account[s], or exercise any right of set-off
or banker's lien with respect thereto except as provided herein. KCS and the
Lender agree that you may debit the Lock-Box Account[s] for any items deposited
in the Lock-Box Account[s] which may be returned or otherwise not collected,
and, after delivery to you of the Letter, for your standard and customary fees
in connection with the maintenance of the Lock-Box Account[s].

Any notice provided for in this agreement may be personally delivered,
sent by facsimile or United States mail, certified return receipt requested, to
the address or facsimile number set forth under the signature to this agreement
of the party to be notified (or to such other address or facsimile number as
shall be designated in writing by such party to all other parties to this
agreement). All notices shall be effective upon receipt.

You may terminate this agreement only upon thirty days' prior written
notice to that effect to KCS and the Lender. After such termination, incoming
mail addressed to any closed lock-box(es) shall be forwarded in accordance with
KCS's instructions, if terminated prior to the delivery to you of the Letter,
otherwise with the Lender's instructions. This agreement may also be terminated
upon written notice to you by the Lender. Except as otherwise provided in this
paragraph, this agreement may not be

2
<PAGE> 28

terminated or amended without the prior written consent of the Lender.

This agreement shall inure to the benefit of and shall be binding upon
the respective successors and assigns of the parties hereto, but it may not be
assigned in whole or in part by any party without the prior written consent of
the other parties.

Very truly yours,

KCS ENERGY MARKETING, INC.

By:
---------------------------------------------
Title:
---------------------------------------
Address:
-------------------------------------
Facsimile:
-----------------------------------
Agreed to:

CANADIAN IMPERIAL BANK OF COMMERCE, as
Lender

By:
----------------------------------
Title:
----------------------------
Address: 425 Lexington Avenue
New York, New York 10017
Facsimile: (212) 856-3643

[LOCK-BOX BANK]

By:
----------------------------------
Title:
----------------------------
Address:
--------------------------
Facsimile:
------------------------

3
<PAGE> 29
Attachment A
to Form of
Lock-Box Agreement

Form of Notice to Lock-Box Bank

_________, 19 __

[Name of Lock-Box Bank]
[Address]

Gentlemen:

Pursuant to that certain letter agreement among us and KCS Energy
Marketing, Inc. ("KCS"), dated ___________, 1994 (the "Agreement"), we hereby
notify you that KCS has transferred exclusive ownership and control of its
lock-box account[s] no[s]. __________ maintained with you (the "Lock-Box
Account[s]") to Canadian Imperial Bank of Commerce ("CIBC"), under the Security
Agreement dated as of January 11, 1995 among KCS, KCS Energy, Inc. and CIBC, as
Lender (the "Lender") and under the Loan Agreement dated as of January 11, 1995
among KCS, KCS Energy, Inc., Proliq, Inc. and the Lender.

By signing the Agreement, KCS has agreed that, pursuant to the terms of
the Agreement, the Lender shall be irrevocably entitled to exercise any and all
rights in respect of or in connection with the Lock-Box Account[s], including,
without limitation, the right to specify when payments are to be made out of or
in connection with the Lock-Box Account[s].

Very truly yours,

CANADIAN IMPERIAL BANK OF COMMERCE,
as Lender

By:
----------------------------------
Title:
----------------------------
Address: 425 Lexington Avenue
New York, New York 10017

<PAGE> 1

Exhibit 10.5
================================================================================

PLEDGE AND SECURITY AGREEMENT

Dated as of January 11, 1995

between

PROLIQ, INC.

and

CANADIAN IMPERIAL BANK OF COMMERCE

================================================================================

<PAGE> 2

PLEDGE AND SECURITY AGREEMENT

TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I Definitions ................................ 2
Section 1.1 Definitions ............................ 2

ARTICLE II Obligations Secured ........................ 2
Section 2.1 Obligations Secured Hereby ............. 2

ARTICLE III Representations and Warranties; Covenants .. 3
Section 3.1 Representations and Warranties ......... 3
Section 3.2 Covenants .............................. 4
Section 3.3 Indemnity .............................. 5

ARTICLE IV Pledged Collateral ......................... 5
Section 4.1 Assignment of Pledged Collateral and
Agreements ........................... 5
Section 4.2 Delivery of the Pledged Collateral ..... 6
Section 4.3 Record Ownership of Pledged Shares ..... 8
Section 4.4 Right to Receive Distributions ......... 8
Section 4.5 Right to Vote Pledged Shares and
Shares ............................... 9
Section 4.6 Application of Pledged Collateral ...... 10
Section 4.7 Obligations Absolute; Enforceability by
the Lender ........................... 10

ARTICLE V Default .................................... 11
Section 5.1 Rights of the Collateral Agent upon an
Event of Default ..................... 11

ARTICLE VI Amendments, Modifications, Waivers and
Consents ............................. 14
Section 6.1 Execution of Amendments, etc ........... 14

ARTICLE VII Miscellaneous .............................. 14
Section 7.1 Further Assurances ..................... 14
Section 7.2 No Waiver; Cumulative Remedies ......... 15
Section 7.3 Notices, etc. .......................... 15
Section 7.4 Fee; Costs and Expenses, etc. .......... 16
Section 7.5 Collateral Agent Appointed
Attorney-in-Fact ..................... 17
Section 7.6 Termination ............................ 17
Section 7.7 Governing Law .......................... 18
</TABLE>

<PAGE> 3

<TABLE>
<CAPTION>
Page
----

<S> <C>
Section 7.8 Severability of Provisions ......... 18
Section 7.9 Headings ........................... 18
Section 7.10 Execution in Counterparts .......... 18
Section 7.11 Reinstatement ...................... 18
Section 7.12 Successors and Assigns ............. 19
</TABLE>

Schedule 3.1 - Locations of the Guarantor

ii
<PAGE> 4

PLEDGE AND SECURITY AGREEMENT

PLEDGE AND SECURITY AGREEMENT dated as of January 11, 1995 among
PROLIQ, INC., a New Jersey corporation (the "Guarantor") and CANADIAN IMPERIAL
BANK OF COMMERCE, as Lender (the "Lender") under the Loan Agreement (as
hereinafter defined).

WITNESSETH:

WHEREAS, KCS Energy Marketing, Inc., a wholly-owned subsidiary of the
Guarantor (the "Borrower"), the Guarantor, KCS Energy, Inc. (the "Parent") and
the Lender have entered into a Loan Agreement dated as of January 11, 1995 (as
the same from time to time may be extended, amended, supplemented, waived or
modified and in effect, the "Loan Agreement") providing, among other things, for
the commitment of the Lender to make Loans to the Borrower on the terms and
conditions set forth in the Loan Agreement and for the Guarantor, jointly and
severally with the Parent, to guaranty certain obligations of the Borrower under
the Loan Agreement; and

WHEREAS, the Guarantor is the record and beneficial owner of one
hundred percent (100%) of the outstanding shares of Capital Stock of the
Borrower; and

WHEREAS, the Guarantor is entering into this Agreement with the Lender
for the purpose of, among other things, granting the Lender a first lien and
security interest in the Pledged Collateral (as such term is defined in Section
4.1 hereof) for the purpose of securing all amounts at any time and from time to
time owing by the Guarantor to the Lender under or in connection with this
Agreement or any other Loan Document (as such term is defined in the Loan
Agreement).

NOW, THEREFORE, in consideration of the premises and in order to induce
the Lender to make Loans to the Borrower as provided in the Loan Agreement, the
Guarantor agrees with the Lender as follows:

<PAGE> 5

ARTICLE I

Definitions

ARTICLE II

Obligations Secured

Section 2.1 Obligations Secured Hereby. This Agreement is made to
provide for and secure repayment of the following indebtedness and liabilities
of the Guarantor (such indebtedness and liabilities being herein called the
"Secured Obligations") in the order of priority indicated:

First, the repayment of all amounts advanced or expended by the
Lender for the account of the Guarantor hereunder or in connection with
this Agreement or any other Loan Document, the payment of all costs and
expenses at any time and from time to time incurred by the Lender in
connection with the enforcement of or preservation of any right under
this Agreement or any other Loan Document (including, without
limitation, the fees and expenses of counsel employed by the Lender in
connection therewith), the payment of all reasonable costs and expenses
at any time and from time to time incurred by the Lender in connection
with the administration of this Agreement or any other Loan Document
(including, without limitation, the reasonable fees and expenses of
counsel employed by the Lender in connection therewith) and the payment
of all indemnities and other amounts at any time and from time to time
payable hereunder or under any other Loan Document or in connection
herewith or therewith to the Lender by the Guarantor, and

Second, the payment of the Guaranteed Obligations and interest
with respect thereto, and

Third, the repayment of all other amounts at any time and from
time to time owing by the

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<PAGE> 6

Guarantor to the Lender under or in connection with this Agreement or
any other Loan Document, including, without limitation, any other
costs, expenses, indemnities other amounts at any time and from time to
time payable under or in connection with this Agreement or any other
Loan Document.

ARTICLE III

Representations and Warranties; Covenants

Section 3.1 Representations and Warranties. (a) The Guarantor
reaffirms and repeats its representations and warranties contained in the Loan
Agreement and agrees that the the Lender may rely on such representations and
warranties as though set forth herein in full.

(b) Upon delivery of the Pledged Shares (as such term is defined in
Section 4.1(i) hereof) or any Shares (as such term is defined in Section
4.1(iii) hereof) to the Lender in accordance with Section 4.2 hereof the Lender
will have a valid and perfected first priority security interest in all the
Pledged Collateral subject to no prior Liens.

(d) (i) No financing statement listing the Guarantor as debtor (other
than any which may have been filed for the benefit of the Lender ) covering any
of the Pledged Collateral is on file in any public office; and (ii) the
Guarantor is and will be the lawful owner of, and has and will have good and
marketable title to, all Pledged Collateral, free and clear of all Liens except
for the Lien and security interest granted pursuant hereto in favor of the
Lender.

(e) The Guarantor has not previously created any security interest in
the Pledged Collateral or any part thereof.

(f) This Agreement has been duly authorized, executed and delivered by
the Guarantor and constitutes a legal, valid and binding obligation of the
Guarantor, enforceable against the Guarantor in accordance with its terms.

(g) The Guarantor has valid rights in and good title to the Pledged
Collateral and has full corporate power and authority to grant to the Lender the
security interest

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<PAGE> 7

in the Pledged Collateral pursuant hereto and to execute, deliver and perform
its obligations in accordance with the terms of this Agreement, without the
consent or approval of any other Person.

(h) Schedule 3.1 hereto sets forth the location of the chief executive
office of the Guarantor.

(i) All of the Pledged Shares and Shares (as such terms are defined in
Section 4.2(i) and 4.2(iii), respectively) delivered pursuant to Section 4.2
hereof have been and will be duly authorized and validly issued and are and will
be fully paid and nonassessable; and none of such Pledged Shares or Shares are
or will be subject to options to purchase or similar rights of any Person. The
Guarantor is not and will not (without the prior written consent of the Lender)
become a party or otherwise be bound by any agreement, other than this
Agreement, which restricts in any manner the rights of any present or future
holder of any of the Pledged Shares or Shares with respect to the Pledged Shares
or Shares.

(j) There are no restrictions upon the voting rights associated with,
or upon the transfer or encumbrance of, any of the Pledged Shares.

(k) The Pledged Shares constitute 100% of the issued and outstanding
shares of Capital Stock of the Borrower.

Section 3.2 Covenants. (a) The Guarantor shall comply fully with the
provisions of this Agreement and any other Loan Document and punctually perform
its obligations thereunder and hereunder.

(b) The Guarantor will not create, permit or suffer to exist, and will
defend the Pledged Collateral against, and take such other actions as are
necessary to remove, any Lien, claim or right in, to or on the Pledged
Collateral, and will defend the right, title and interest of the Lender in and
to the Pledged Collateral against the claims and demands of all Persons
whomsoever, other than the Liens created hereby.

(c) The Guarantor shall not sell, encumber, or otherwise dispose of or
transfer, any Pledged Collateral or right or interest therein, other than to the
Lender.

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<PAGE> 8

(d) The Guarantor agrees promptly to notify the Lender of any change
(i) in its corporate name or in any trade name used to identify it in the
conduct of its business or in the ownership of its properties or (ii) in the
location of its chief executive office or its principal place of business.

(f) The Guarantor will pay (or require to be paid), prior to their
becoming delinquent, all taxes, assessments, insurance premiums, charges,
encumbrances and liens now or hereafter imposed upon or affecting any Pledged
Collateral.

Section 3.3 Indemnity. The Guarantor hereby agrees to indemnify the
Lender and hold the Lender harmless with respect to any and all losses, costs,
claims, damages, penalties, causes of action, suits, judgments, liabilities and
expenses (including, without limitation, attorneys' fees and expenses) incurred
or suffered by the Lender arising out of or resulting from (i) the failure to be
true or to continue to be true any of the representations or warranties, or the
failure of the Guarantor to comply with any of the covenants, in this Article
III or elsewhere in this Agreement and (ii) the assignment and security interest
granted hereby, including, without limitation, the costs, expenses and
disbursements (including attorneys' fees and expenses) incurred or suffered by
the Lender in enforcing, preserving or collecting under the security interest
granted hereby. The obligations of the Guarantor under this Section 3.3 shall
survive the termination of this Agreement and the discharge of the Secured
Obligations hereunder and shall also survive the termination of any other Loan
Document to which it is a party.

ARTICLE IV

Pledged Collateral

Section 4.1 Assignment of Pledged Collateral and Agreements. In order
to secure and to provide for the repayment of the Secured Obligations, the
Guarantor hereby assigns, conveys, transfers, delivers and sets over unto the
Lender, and hereby grants the Lender, a security interest in all of the
Guarantor's right, title and interest in the following assets (whether now
existing or hereafter arising) which are from time to time subjected to the Lien
of this Agreement by delivery thereof to the Lender or otherwise

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<PAGE> 9

(all of the following indicated in (i) through (vi) being referred to as the
"Pledged Collateral"):

(i) any and all Capital Stock and other equity securities and
other ownership interest in (including, without limitation, stock or
securities exchangeable for or convertible into Capital Stock or other
equity securities or ownership interests) of the Borrower
(collectively, the "Pledged Shares") and the certificates representing
such Pledged Shares, and all dividends, cash, instruments or other
property from time to time received, receivable or otherwise
distributed in respect of or in exchange for any or all of the Pledged
Shares;

(ii) any and all options, warrants or other rights of the Guarantor
to acquire additional securities of the same class as the Pledged
Shares of the Borrower;

(iii) any additional shares of common stock of the Borrower
("Shares") which are acquired by the Guarantor;

(iv) all instruments, files, records, ledger sheets and documents
covering or relating to any of the foregoing;

(vi) all rights and privileges of the Guarantor with respect to the
foregoing.

Section 4.2 Delivery of the Pledged Collateral. (a) Without the prior
written consent of the Lender, the Guarantor will not take any action to cause
the Pledged Collateral delivered to the Lender pursuant to this Agreement to be
removed from the possession of the Lender, to revert to the Guarantor or any
interest therein to be assigned to any other Person.

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<PAGE> 10

(b) The Guarantor shall deliver the Pledged Shares, and if the
Guarantor shall become entitled to receive or shall receive additional Shares of
the Borrower, the Guarantor shall deliver such Shares, to the Lender in pledge
under this Agreement.

(c) All Pledged Shares and Shares delivered to the Lender pursuant to
this Agreement shall be accompanied by duly executed stock powers executed by
the Guarantor in blank, with signatures appropriately guaranteed, and
accompanied in each case by any required transfer tax stamps, all in form and
substance satisfactory to the Lender.

(d) After the occurrence of a Portfolio Event or an Event of Default,
any other Pledged Collateral shall be delivered, pledged or otherwise subjected
to the lien of this Agreement as the Lender may reasonably require.

(e) If the Guarantor shall, as a result of its ownership of the Pledged
Shares or the Shares delivered pursuant to this Section 4.2, become entitled to
receive or shall receive any stock certificate (including, without limitation,
any certificate representing a stock dividend or a distribution in connection
with any reclassification, increase or reduction of capital or any certificate
issued in connection with any reorganization), option or rights, whether in
addition to, in substitution of, as a conversion of, or in exchange for any of
the Pledged Shares or the Shares, or otherwise in respect thereof, the Guarantor
shall accept the same as the agent of the Lender, hold the same in trust for the
Lender and deliver the same forthwith to the Lender in the exact form received,
duly endorsed by the Guarantor to the Lender, together with an undated stock
power covering such certificate duly executed in blank by the Guarantor and with
signatures appropriately guaranteed, to be held by the Lender, subject to the
terms hereof, as additional collateral security for the Secured Obligations.

(f) Any sums paid upon or in respect of the Pledged Shares or the
Shares delivered pursuant to this Section 4.2 upon the liquidation or
dissolution of the Borrower shall be paid over to the Lender to be held by it
hereunder as additional collateral security for the Secured Obligations, and in
case any distribution of capital shall be made on or in respect of the Pledged
Shares or the Shares delivered pursuant to this Section 4.2 or any property
shall be distributed upon or with respect to the Pledged Shares or

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<PAGE> 11

the Shares delivered pursuant to this Section 4.2 pursuant to the
recapitalization or reclassification of the capital of the Borrower or pursuant
to the reorganization thereof, the property so distributed shall be delivered to
the Lender to be held by it hereunder as additional collateral security for the
Secured Obligations. If any sums of money or property so paid or distributed in
respect of the Pledged Shares or the Shares delivered pursuant to this Section
4.2 shall be received by the Guarantor, the Guarantor shall, until such money or
property is paid or delivered to the Lender, hold such money or property in
trust for the Lender, segregated from other funds of the Guarantor, as
additional collateral security for the Secured Obligations.

(g) All Pledged Shares, Shares and other Pledged Collateral held by the
Lender under this Agreement shall be segregated from the other assets of the
Lender and identified on the records of the Lender as property pledged to secure
the Lender under this Agreement.

Section 4.3 Record Ownership of Pledged Shares. The Lender may at any
time or from time to time after the occurrence of an Event of Default, in its
sole discretion, cause any or all of the Pledged Shares or Shares delivered
pursuant to Section 4.2 hereof to be transferred of record into the name of the
Lender or its nominee. The Guarantor agrees promptly to give the Lender copies
of any notices or other communication received by it with respect to the Pledged
Shares or Shares registered in the name of the Guarantor, and the Lender will
promptly give to the Guarantor copies of any notices and communications received
by the Lender with respect to the Pledged Shares or Shares registered in the
name of the Lender or its nominee.

Section 4.4 Right to Receive Distributions. (a) So long as no Event of
Default shall have occurred, the Guarantor shall have the right to receive all
dividends, interest and other payments and distributions (in each case to the
extent in the form of cash in the ordinary course of business, and not in
connection with the dissolution or liquidation of the Borrower) upon or with
respect to the Pledged Shares or Shares. To the extent in a form other than cash
in the ordinary course of business, or if in connection with the dissolution or
liquidation of the Borrower, all such dividends, interest and other payments and
distributions shall be retained by the Lender in pledge under this Agreement,
or, if received by the Guarantor,

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<PAGE> 12

shall be forthwith delivered to the Lender in the form received (with any
necessary endorsement).

(b) Upon the occurrence of an Event of Default, the Lender shall also
have the right to receive, and to retain as Pledged Collateral under this
Agreement, all cash dividends, interest and other payments and distributions
made upon or with respect to the Pledged Shares or Shares and the Guarantor
shall take all such action as the Lender may deem necessary or appropriate to
give effect to such right. Upon the occurrence of an Event of Default, all such
dividends, interest and other payments and distributions which are received by
the Guarantor shall be received in trust for the benefit of the Lender, and
shall be segregated from other funds of the Guarantor and shall, forthwith be
paid over to the Lender as Pledged Collateral in the same form as received (with
any necessary endorsement).

Section 4.5 Right to Vote Pledged Shares and Shares. (a) Unless an
Event of Default shall have occurred, the Guarantor shall have the right, from
time to time, to vote and to give consents, ratifications and waivers with
respect to the Pledged Shares and any Shares delivered pursuant to Section 4.2
hereof.

(b) Without the prior written consent of the Lender, the Guarantor will
not vote to enable, or take any other action to permit, the Borrower to issue
any Capital Stock or other equity securities of any nature or to issue any other
securities convertible into, or granting the right to purchase or exchange for,
any Capital Stock or other equity securities of any nature of the Borrower.

(c) If an Event of Default shall have occurred, the Lender may, to the
extent permitted by law, and the Guarantor shall take all such action as may be
necessary or appropriate to give effect to such right, to vote and to give
consents, ratifications and waivers, and take any other action with respect to
all the Pledged Shares and any Shares delivered pursuant to Section 4.2 hereof
with the same force and effect as if the Lender were the absolute and sole owner
of such Pledged Shares and Shares, including without limitation the right to
vote such Pledged Shares and Shares for and/or against directors of the Borrower
at a meeting of the stockholders thereof or by unanimous written consent of the
stockholders thereof or otherwise.

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<PAGE> 13

Section 4.6 Application of Pledged Collateral. (a) Upon the occurrence
of or an Event of Default, the Lender may apply the Pledged Collateral and the
proceeds thereof to the payment or repayment in full of all accrued and unpaid
Secured Obligations, in the order of priority specified in Section 2.1 hereof.

(b) At its option, the Lender may discharge past due Taxes or Liens at
any time levied or placed on the Pledged Collateral and not permitted under any
other Loan Document, and the Guarantor agrees to reimburse the Lender on demand
for any payment made or any expense incurred by it pursuant to the foregoing
authorization; provided, however, that nothing in this Section 4.6(b) shall be
interpreted as excusing the Guarantor from the performance of, or requiring the
Lender to cure or perform, any covenants or other promises of the Guarantor with
respect to Taxes or Liens as set forth herein or in any other Loan Document.

Section 4.7 Obligations Absolute; Enforceability by the Lender. The
Guarantor hereby acknowledges that its obligations under this Agreement are and
shall be absolute and unconditional under any and all circumstances, including,
without limitation, the following circumstances: (a) any amendment,
modification, supplement or waiver of or to any provision of this Agreement or
any other Loan Document, or the illegality, invalidity, irregularity or
unenforceability of this Agreement, any other Loan Document, or any Loans made
to the Borrower, or (b) the breach or falsity (whether or not material) of any
representation or warranty on the part of the Guarantor contained or reaffirmed
and repeated in this Agreement or any other Loan Document, or the breach or
falsity (whether or not material) of any representation or warranty on the part
of the Borrower contained or reaffirmed and repeated in any Loan Document, or
otherwise made to the Lender under or in connection with any of the foregoing,
or (c) any failure on the part of the Lender to perform or observe any term,
covenant or agreement on its part to be performed or observed under this
Agreement, any other Loan Document or any other agreement, instrument or
document delivered in connection with any of the foregoing, or (d) the existence
of any setoff, counterclaim, recoupment, defense or other right or claim which
the Guarantor may at any time have or have had against the Lender, or (e) the
dissolution, bankruptcy, insolvency or reorganization of the Guarantor or the
Borrower or the appointment of a receiver, trustee, custodian or liquidator for
any of the Guarantor's or the

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<PAGE> 14

Borrower's assets, including without limitation, the Guarantor's interest in the
Pledged Collateral or the Borrower's interest in the Assigned Collateral, or (f)
the existence of any law, rule, regulation, order, writ, judgment, decree,
determination or award purporting in any manner to affect this Agreement, any
other Loan Document or any other agreement, instrument or document executed and
delivered pursuant to or in connection with any of the foregoing, the Loans made
to the Borrower, or any obligation of the Guarantor under this Agreement, any
other Loan Document or any related document, or any obligation of the Borrower
under any Loan Document or any related document, or (g) any other circumstances
whatsoever which would otherwise constitute an excuse for nonperformance by the
Guarantor of its obligations hereunder, whether similar or dissimilar to any of
the circumstances specified in clauses (a) through (f) above.

ARTICLE V

Default

Section 5.1 Rights of the Lender upon an Event of Default. (a) Upon the
occurrence of an Event of Default, the Lender shall have the right, as the true
and lawful agent of the Guarantor, with power of substitution for the Guarantor
and in the Guarantor's name, the Lender's name or otherwise, for the use and
benefit of the Lender to use, sell, assign, transfer, pledge, make any agreement
with respect to or otherwise deal with all or any of the Pledged Collateral, and
to do all other acts and things necessary to carry out the purposes of this
Agreement, as fully and completely as though the Lender were the absolute owner
of the Pledged Collateral for all purposes; provided, however, that no action
taken or omitted to be taken by the Lender with respect to the Pledged
Collateral or any part thereof shall give rise to any defense, counterclaim or
offset in favor of the Guarantor or to any claim or action against the Lender.
It is understood and agreed that the appointment of the Lender as the agent of
the Guarantor for the purposes set forth above is coupled with an interest and
is irrevocable. The provisions of this Section 5.1 shall in no event relieve the
Guarantor of any of its obligations hereunder or under any other Loan Document
with respect to the Pledged Collateral or any part thereof or impose any
obligation on the Lender to proceed in any particular manner with respect to the
Pledged Collateral or any part thereof, or in any way limit the exercise by the
Lender, of any other

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<PAGE> 15

or further right which it may have on the date of this Agreement or hereafter,
whether hereunder, under any other Loan Document or by law or otherwise.

(b) Upon the occurrence of an Event of Default, the Guarantor agrees
that the Lender shall have the right to sell or otherwise dispose of all or any
part of the Pledged Collateral, at public or private sale or at any broker's
board or on any securities exchange, for cash, upon credit or for future
delivery as the Lender shall deem appropriate. The Lender shall be authorized at
any such sale (if it deems it advisable to do so) (i) to restrict the
prospective bidders or purchasers to a limited number of sophisticated investors
who will represent and agree that they are purchasing the Pledged Collateral for
their own account for investment and not with a view to the distribution or sale
thereof, and (ii) to cause to be placed on certificates for any or all of the
Pledged Shares or on any other securities pledged under this Agreement a legend
to the effect that such security has not been registered under the Securities
Act of 1933, as amended (the "Act"), and may not be disposed of in violation of
the provisions of the Act, and/or (iii) to impose such other limitations or
conditions in connection with any such sale as the Lender deems necessary or
advisable in order to comply with the Act or any other law. The Guarantor
covenants and agrees that it will execute and deliver such documents and take
such other action as the Lender deems necessary or advisable in order that any
such sale may be made in compliance with law. Upon consummation of any such sale
the Lender shall have the right to assign, transfer and deliver to the purchaser
or purchasers thereof the Pledged Collateral so sold. Each such purchaser at any
such sale shall hold the property sold absolutely, free from any claim or right
on the part of the Guarantor, and the Guarantor hereby waives (to the extent
permitted by law) all rights of redemption, stay and appraisal which the
Guarantor now has or may at any time in the future have under any rule of law or
statute now existing or hereafter enacted.

(c) The Lender shall give the Guarantor 10 days' written notice (which
the Guarantor agrees is reasonable notice within the meaning of Section 9-504(3)
of the Uniform Commercial Code as in effect in the State of New York or its
equivalent in other jurisdictions) of the Lender's intention to make any sale of
Pledged Collateral. Such notice, in the case of a public sale, shall state the
time and place for such sale and, in the case of a sale at a broker's board or

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<PAGE> 16

on a securities exchange, shall state the board or exchange at which such sale
is to be made and the day on which the Pledged Collateral, or portion thereof,
will first be offered for sale at such board or exchange. Any such public sale
shall be held at such time or times within ordinary business hours and at such
place or places as the Lender may fix and state in the notice (if any) of such
sale. At any public or private sale, the Pledged Collateral, or portion thereof,
to be sold may be sold in one lot as an entirety or in separate parcels, as the
Lender may (in its sole and absolute discretion) determine. The Lender shall not
be obligated to make any sale of any Pledged Collateral if it shall determine
not to do so, regardless of the fact that notice of sale of such Pledged
Collateral shall have been given. The Lender may, without notice or publication,
adjourn any public or private sale or cause the same to be adjourned from time
to time by announcement at the time and place fixed for sale, and such sale may,
without further notice, be made at the time and place to which the same was so
adjourned. In case any sale of all or any part of the Pledged Collateral is made
on credit or for future delivery, the Pledged Collateral so sold may be retained
by the Lender until the sale price is paid by the purchaser or purchasers
thereof, but the Lender shall not incur any liability in case any such purchaser
or purchasers shall fail to take up and pay for the Pledged Collateral so sold
and, in case of any such failure, such Pledged Collateral may be sold again upon
like notice. At any public sale made pursuant to this Section 5.1(c), the Lender
may bid for or purchase, free (to the extent permitted by law) from any right of
redemption, stay, valuation or appraisal on the part of the Guarantor (all said
rights being also hereby waived and released to the extent permitted by law),
the Pledged Collateral or any part thereof offered for sale and may make payment
on account thereof by using any claim then due and payable to the Lender from
the Guarantor as a credit against the purchase price, and the Lender may, upon
compliance with the terms of sale, hold, retain and dispose of such property
without further accountability to the Guarantor therefor. For purposes hereof, a
written agreement to purchase the Pledged Collateral or any portion thereof
shall be treated as a sale thereof; the Lender shall be free to carry out such
sale pursuant to such agreement and the Guarantor shall not be entitled to the
return of the Pledged Collateral or any portion thereof subject thereto,
notwithstanding the fact that after the Lender shall have entered into such an
agreement all Events of Default shall have been remedied and the Secured
Obligations paid in full. As an alternative to

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<PAGE> 17

exercising the power of sale herein conferred upon it, the Lender may proceed by
a suit or suits at law or in equity to foreclose this Agreement and to sell the
Pledged Collateral or any portion thereof pursuant to a judgment or decree of a
court or courts having competent jurisdiction or pursuant to a proceeding by a
court-appointed receiver.

ARTICLE VI

Amendments, Modifications,
Waivers and Consents

Section 6.1 Execution of Amendments, etc. No amendment, modification,
supplement, termination or waiver of or to any provision of this Agreement, nor
any consent to any departure by the Guarantor from any provision of this
Agreement, shall be effective unless the same shall be in writing and signed on
behalf of the Lender, the Agent and the Guarantor. Any waiver of any provision
of this Agreement, and any consent to any departure by the Guarantor from the
terms of any provision of this Agreement, shall be effective only in the
specific instance and for the specific purpose for which given. No notice to or
demand upon the Guarantor in any instance hereunder shall entitle the Guarantor
to any other or further notice or demand in similar or other circumstances.

ARTICLE VII

Miscellaneous

Section 7.1 Further Assurances. The Guarantor agrees that it will join
with the Lender in executing and, at its own expense, recording, filing and
refiling, or permit the Lender to record, file and refile, such assignments,
financing statements, continuation statements and other documents (including
this Agreement) in such offices as the Lender may deem necessary or appropriate
and wherever required or permitted by law in order to perfect and preserve the
rights and interests granted to the Lender hereby, and hereby authorizes the
Lender to file financing statements and amendments thereto and continuation
statements relative to all or any part thereof without the signature of the
Guarantor where permitted by law, and agrees to do such further acts and things,
and to execute and deliver to the Lender such additional assignments,
agreements, powers and instruments, as the Lender determines to be necessary to
carry into effect the purposes of this

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<PAGE> 18

Agreement or to better assure and confirm unto the Lender its rights, powers and
remedies hereunder. The Guarantor further agrees that it will deliver or cause
to be delivered to the Lender all instruments, certificates or registrations of
transfer as the Lender may deem necessary or appropriate and wherever required
or permitted by law, in order to perfect and preserve the rights and interests
granted to the Lender hereby in that Pledged Collateral which the Lender must
possess to have a valid and perfected first lien security interest. The
Guarantor shall register the pledge of the Pledged Shares or Shares delivered
pursuant to Section 4.2 hereof with any present or future registrar or transfer
agent for the Shares of the Borrower.

Section 7.2 No Waiver; Cumulative Remedies. No failure on the part of
the Lender to exercise, and no delay on the part of the Lender in exercising,
any right, power or remedy hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise of any such right, power or remedy by the
Lender preclude any other or further exercise thereof or the exercise of any
other right, power or remedy. All remedies hereunder are cumulative and are not
exclusive of any other remedies that may be available to the Lender, whether at
law, in equity or otherwise.

Section 7.3 Notices, etc. Except where telephonic (which shall be
confirmed in writing promptly) instructions or notices are authorized herein to
be given, all notices, demands, instructions and other communications required
or permitted to be given under this Agreement shall be in writing and shall be
personally delivered or sent by registered, certified or express mail, postage
prepaid, return receipt requested, or by, facsimile or telegram (with messenger
delivery specified in the case of a telegram), and shall be deemed to be given
for purposes of this Agreement on the date on which such writing is delivered or
sent to the intended recipient thereof in accordance with the provisions of this
Section 7.3 (except that any notice sent by registered or certified mail shall
be deemed to have been given on the fifth Business Day after such notice is
deposited for delivery in the United States mail). Unless otherwise specified in
a notice sent or delivered in accordance with the foregoing provisions of this
Section 7.3, notices, demands, instructions and other communications in writing
shall be given to or made upon the respective parties hereto at their respective
addresses (or to their respective facsimile numbers) indicated below, and, in
the

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case of telephonic instructions or notices, by calling the telephone number or
numbers indicated for such party below:

(a) with respect to the Guarantor:

Proliq, Inc.
379 Thornall Street
Edison, New Jersey 08837
Attention: Kathryn M. Kinnamon
Assistant Treasurer
Telephone: (908) 632-1770
Facsimile: (908) 603-8960

with a copy to:

Orloff, Lowenbach, Stifelman
& Siegel, P.A.
101 Eisenhower Parkway
Roseland, New Jersey 07068
Attention: Ralph M. Lowenbach, Esq.
Telephone: (201) 622-6200
Facsimile: (201) 622-3073

(b) with respect to the Lender:

Canadian Imperial Bank of Commerce
425 Lexington Avenue
New York, New York 10017
Attention: Asset Securitization Group
Telephone: (212) 856-3850
Facsimile: (212) 856-3643

Section 7.4 Fee; Costs and Expenses, etc. The Guarantor hereby agrees
to reimburse the Lender, on demand, for all costs and expenses incurred by the
Lender in connection with the administration and enforcement of this

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<PAGE> 20

Agreement and agrees to indemnify and hold harmless the Lender from and against
any and all losses, costs, claims, damages, penalties, causes of action, suits,
judgments, liabilities and expenses (including, without limitation, attorneys'
fees and expenses) incurred by the Lender hereunder or in connection herewith,
unless such liability shall be due to willful misconduct or gross negligence on
the part of the Lender. If the Guarantor shall fail to do any act or thing which
it has covenanted to do hereunder or any representation or warranty on the part
of the Guarantor contained herein or repeated and reaffirmed herein shall be
breached, the Lender may (but shall not be obligated to) do the same or cause it
to be done or remedy any such breach, and may expend its funds for such purpose.
Any and all amounts so expended by the Lender shall be repayable to it by the
Guarantor upon the Lender's demand therefor. The obligations of the Guarantor
under this Section 8.4 shall survive the termination of this Agreement, the
resignation of the Lender, and the discharge of the other obligations of the
Guarantor hereunder and shall also survive the termination of the Loan
Agreement.

Section 7.5 Lender Appointed Attorney-in-Fact. Until all Secured
Obligations are paid, the Guarantor hereby appoints the Lender its
attorney-in-fact, with full power of substitution, for the purpose of taking
such action and executing agreements, instruments and other documents, in the
name of the Guarantor, as the Lender may deem necessary or advisable to
accomplish the purposes hereof, which appointment is coupled with an interest
and is irrevocable.

Section 7.6 Termination. Subject to Section 7.11, this Agreement and
the assignments, pledges and security interests created or granted hereby shall
terminate when (a) all Guaranteed Obligations shall have been fully paid and
satisfied, (b) the commitments and obligations of the Lender under the Loan
Agreement and related documents have terminated, (c) all obligations of the
Borrower and the Guarantor due and owing under or in respect of the Loan
Documents shall have been satisfied and fully paid, and (d) the Lender receives
a certificate from the parties hereto certifying as to the matters in clauses
(a) through (c) above, at which time the Lender shall reassign, without recourse
upon, or any warranty whatsoever by, the Lender, and deliver to the Guarantor
all Pledged Collateral and documents then in the custody or possession of the
Lender and, if requested by the Guarantor, shall execute and deliver to the
Guarantor for recording or filing in each

17
<PAGE> 21

office in which any assignment or financing statement relative to the Pledged
Collateral or the agreements relating thereto or any part thereof, shall have
been filed or recorded, a termination statement or release under Applicable Law
releasing the Lender's interest therein, and such other documents and
instruments as the Guarantor may reasonably request, all without recourse upon
or warranty whatsoever by, the Lender, and at the cost and expense of the
Guarantor.

Section 7.7 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.

Section 7.9 Headings. Article and Section headings used in this
Agreement are for convenience of reference only and shall not affect the
construction of this Agreement.

Section 7.11 Reinstatement. This Agreement shall continue to be
effective, or be reinstated, as the case may be, if at any time any amount
received by the Lender in respect of the Pledged Collateral is rescinded or must
otherwise be restored or returned by the Lender upon the insolvency, bankruptcy,
dissolution, liquidation or reorganization of the Borrower or the Guarantor or
the appointment of an intervenor or conservator of, or trustee or similar
officer for, the Borrower or the Guarantor or any substantial part of its
respective properties, or otherwise, all as though such payment had not been
made.

18
<PAGE> 22

Section 7.12 Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of the Guarantor and the Lender and their
respective successors and assigns except that the Guarantor may not assign or
transfer to any other Person or have assumed by any other Person (by operation
of law or otherwise) all or any part of its rights or obligations hereunder
without the prior written consent of the Lender. The Guarantor expressly agrees
that this Agreement shall be for the benefit of the Lender and its successors
and assigns. This Agreement shall not be construed so as to confer any right or
benefit upon any Person other than the parties to this Agreement and the parties
to the the Loan Agreement and the Security Agreement and each of their
respective successors and assigns.

19
<PAGE> 23

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized, as of the date
first above written.

PROLIQ, INC.

By
-----------------------------------
Authorized Signatory

CANADIAN IMPERIAL BANK OF COMMERCE,
as Lender

By
-----------------------------------
Authorized Signatory

20
<PAGE> 24

Schedule 3.1
to the
Pledge Agreement

Locations of the Guarantor

Chief Executive Office

379 Thornall Street
Edison, New Jersey 08837

<PAGE> 1
Exhibit 11
Statement re Computation of Per Share Earnings

Primary earnings per share were calculated as follows:

<TABLE>
<CAPTION>
Three Months Ended
December 31,
------------------------------------
1994 1993
---- ----
In Thousands
Except per share amounts
<S> <C> <C>
Net income $7,095 $6,219
====== ======
Average shares of common stock outstanding 11,437 11,404
Add: Net shares assumed to be issued for
dilutive stock options 302 429
------ ------
Average shares of common stock and
common stock equivalents outstanding 11,739 11,833
====== ======
Earnings per share of common stock and
common stock equivalents $0.60 $0.53
====== ======
</TABLE>

Fully diluted earnings per share were calculated as follows:

<TABLE>
<CAPTION>
Three Months Ended
December 31,
------------------------------------
1994 1993
---- ----
In Thousands
Except per share amounts
<S> <C> <C>
Net income $7,095 $6,219
====== ======
Average shares of common stock outstanding 11,437 11,404
Add: Net shares assumed to be issued for
dilutive stock options 305 431
------ ------
Average shares of common stock and
common stock equivalents outstanding
assuming full dilution 11,742 11,835
====== ======
Earnings per share of common stock and
common stock equivalents assuming full
dilution $0.60 $0.53
====== ======
</TABLE>

<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> DEC-31-1994
<CASH> 988
<SECURITIES> 0
<RECEIVABLES> 60,254
<ALLOWANCES> 305
<INVENTORY> 2,509
<CURRENT-ASSETS> 67,594
<PP&E> 198,643
<DEPRECIATION> 54,239
<TOTAL-ASSETS> 214,423
<CURRENT-LIABILITIES> 51,379
<BONDS> 0
<COMMON> 123
0
0
<OTHER-SE> 80,545
<TOTAL-LIABILITY-AND-EQUITY> 214,423
<SALES> 91,306
<TOTAL-REVENUES> 91,306
<CGS> 66,503
<TOTAL-COSTS> 66,503
<OTHER-EXPENSES> 12,782
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,124
<INCOME-PRETAX> 11,005
<INCOME-TAX> 3,910
<INCOME-CONTINUING> 7,095
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,095
<EPS-PRIMARY> 0.60
<EPS-DILUTED> 0.60

</TABLE>