Tax Gain \ Basis Guide : Petrohawk Energy Corporation

Note – this section is for informational purposes only. Please consult your tax advisor to determine your federal, state, local or foreign income reporting requirements.

This section will assist you in calculating the tax gain (but not loss) and related basis in shares received in the merger of KCS Energy Inc with and into Petrohawk Energy Corporation.

In the merger each issued and outstanding share of KCS common stock received as consideration 1.65 shares of Petrohawk Energy Corporation common stock and $9.00 in cash per share.

Each KCS shareholder generally will recognize gain (but not loss) equal to the lesser of:

the amount of cash received by the shareholder in the merger and
the excess, if any, of

the sum of the amount of cash and the fair market value of the Petrohawk common stock received by the shareholder in the merger over
the shareholder’s adjusted tax basis in the KCS common stock exchanged by the shareholder in the merger.

No fractional shares of Petrohawk common stock were issued. If any fractional shares were created from the conversion, the shareholder received cash (calculated by multiplying the fraction of the share times $12.49). A KCS shareholder receiving cash instead of a fractional share of Petrohawk common stock recognizes capital gain or loss based upon the difference between the amount of cash received and the tax basis the shareholder would have in such fractional share.

The fair market value of Petrohawk common stock at the effective date of merger is $12.36.

For example, assume you owned 100 shares of KCS (at the date of merger) with a tax basis of $2,500. This reflects a tax basis per share of $25 ($2500 divided by 100 shares).

You would have received 165 shares of Petrohawk common stock (100 shares times 1.65) as a result of the merger and $900 cash (100 shares times $9.00).

Fair market value of Petrohawk common stock received is $2039.40 (165 shares times $12.36).

The sum of cash and the fair market value of Petrohawk common stock received is $2,939.40 which exceeds your tax basis of $2500 by $439.40.

In that the excess of the sum of the fair market value of stock and cash received, $439.40 is less than the actual cash received of $900, the gain recognized is limited to $439.40.

The tax basis in the shares of Petrohawk common stock received in exchange for the KCS common stock will be the same as the aggregate tax basis in the shareholder’s KCS common stock surrendered in the merger, decreased by the amount of cash received and increased by the amount of gain recognized in the merger.

Based upon the above example, the tax basis in the Petrohawk shares received is $2,039.40 (tax basis of KCS shares $2,500 less cash received $900 plus the gain recognized of $439.40).

The holding period of Petrohawk common shares received by a KCS shareholder will generally include the holding period of the shareholder’s KCS common stock exchanged for Petrohawk common stock.

If a KCS shareholder has differing bases or holding periods in respect of his or her KCS shares, they should consult with their tax advisor to identify the bases or holding periods of the particular shares of Petrohawk common stock received in the merger.

The following may be used to assist you in the calculation or your tax basis in the Petrohawk shares. It currently displays the above transaction. Simply update the number of KCS shares owned and amount invested to calculate your basis in Petrohawk shares.

Download the Calculator (26KB)

There are certain circumstances, generally involving a KCS shareholder who is also a substantial holder of Petrohawk common stock, in which all or part of the gain recognized by such stockholder would be treated as a dividend rather than as a capital gain. Each KCS shareholder should consult his or her tax advisor about the possibility that all or a portion of any cash received in KCS common stock will be treated as a dividend, based upon the shareholder’s specific circumstances.

The above discussion is intended to provide general guidance as to the computation of the tax gain\tax basis in shares received in the merger of KCS Energy Inc with and into Petrohawk Energy Corporation. It is not intended to address tax consequences that may vary with, or are contingent upon individual circumstances. Non U.S. persons should address the applicability of the above discussion to their respective situations.

Accordingly, each KCS shareholder is urged to consult with his or her own tax advisor to determine the particular federal, state, local or foreign income reporting required by that shareholder.

For further information please see the link below to the tax section from the merger proxy.

Proxy - Tax Section (440KB)