Exhibit 10.21
EXECUTION
PLEDGE AND SECURITY AGREEMENT
(PostRock Energy Services Corporation)
     THIS PLEDGE AND SECURITY AGREEMENT (herein referred to as this “Security
Agreement”) is executed as of September 21, 2010, by POSTROCK ENERGY SERVICES
CORPORATION a Delaware corporation formerly known as Quest Resource Corporation
and successor by merger to Quest Resource Acquisition Corp. and PostRock
Midstream, LLC (the successor by merger to Quest Midstream Partners, L.P. and
Quest Midstream GP, LLC), Quest Cherokee Oilfield Service, LLC, Quest Mergersub,
Inc., Quest Midstream Holdings Corp., Quest Energy Service, LLC and Energy &
Midstream Partners JV, LLC (“Debtor”), whose address is 210 Park Avenue,
Suite 2750, Oklahoma City, Oklahoma 73102, for the benefit of ROYAL BANK OF
CANADA (in its capacity as “Administrative Agent” and “Collateral Agent” for the
Lender (hereafter defined)), as “Secured Party,” whose address is Royal Bank
Plaza, P.O. Box 50, 200 Bay Street, 12th Floor, South Tower, Toronto, Ontario
M5J 2W7.
RECITALS
     A. Debtor, formerly known as Quest Resource Corporation, the Administrative
Agent and Lender entered into a Credit Agreement dated as of November 15, 2007
providing for an aggregate revolving credit facility of $50,000,000 (the
“Original Credit Agreement”).
     B. Pursuant to a Membership Interest Purchase Agreement dated as of June 5,
2008 between PetroEdge Resources Partners, LLC, a Delaware limited liability
company, as seller, and Debtor, as buyer, on July 11, 2008 in consideration for
the payment of $140 million the Debtor acquired 100% of the limited liability
company membership interest in PetroEdge Resources (WV) LLC, a Delaware limited
liability company. PetroEdge Resources (WV) LLC owned oil and gas properties in
Steuben County, New York, in Potter, Somerset and Lycoming Counties,
Pennsylvania, and in Braxton, Cabell, Calhoun, Doddridge, Gilmer, Kanawha,
Lewis, Lincoln, Monongalia, Pleasants, Putnam, Ritche, Wetzel and Wood Counties,
West Virginia.
     C. Effective as of July 11, 2008, PetroEdge Resources (WV) LLC changed its
name to Quest Eastern Resource LLC.
     D. Pursuant to an Agreement for Purchase and Sale dated as of July 11, 2008
among Debtor, Quest Eastern Resource LLC and Quest Cherokee, LLC, a Delaware
limited liability company, Quest Eastern Resource LLC agreed to sell its
producing oil and gas properties to Quest Cherokee, LLC for $70,000,000.
Pursuant to an Assignment of Certain Lease Interests and Bill of Sale dated as
of July 11, 2008 among Quest Eastern Resource LLC, as assignor, and Quest
Cherokee, LLC, as assignee (the “Well Bore Assignment”), Quest Eastern Resource
LLC conveyed and assigned to Quest Cherokee, LLC all of its producing properties
in Steuben County, New York, and in Braxton, Cabell, Calhoun, Doddridge, Gilmer,
Kanawha, Lewis, Lincoln, Monongalia, Pleasants, Putnam, Ritche, Wetzel and Wood
Counties, West Virginia.
     E. The Original Credit Agreement was amended and restated in its entirety
by an Amended and Restated Credit Agreement dated as of July 11, 2008 among the
Debtor, Administrative Agent and Lender (the “First Amended and Restated Credit
Agreement”). Pursuant to the First Amended and Restated Credit Agreement the
outstanding balance of $35,000,000 owing under the Original Credit Agreement was
converted to a $35,000,000 term loan with a maturity date of July 11, 2010 (the
“Original Term Loan”).
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     F. Pursuant to a Guaranty dated July 11, 2008 (the “Quest Eastern
Guaranty”), Quest Eastern Resource LLC guaranteed the indebtedness of the Debtor
under the First Amended and Restated Credit Agreement. Additionally, Quest
Eastern Resource LLC granted a mortgage lien to the Administrative Agent for the
benefit of the Lender on all of Quest Eastern Resource LLC’s oil and gas
properties remaining after giving effect to the Well Bore Assignment (other than
the Steuben County, New York oil and gas properties which were not mortgaged
because of New York mortgage tax considerations).
     G. The First Amended and Restated Credit Agreement was amended and restated
in its entirety by a Second Amended and Restated Credit Agreement dated as of
September 11, 2009 among the Debtor, Administrative Agent and Lender (the
“Second Amended and Restated Credit Agreement”). Pursuant to the Second Amended
and Restated Credit Agreement, Lender agreed to advance up to an additional
$8,000,000 to the Debtor to fund the development by Quest Eastern Resource LLC
of three wells in Wetzel County, West Virginia pursuant to an Amended and
Restated Farmout Agreement dated January 13, 2009 but effective as of August 20,
2006 and to fund certain general and administrative expenses, working capital
and other corporate purposes of the Original Borrower (the “Revolving O&G
Development Loan”).
     H. Pursuant to the Second Amended and Restated Credit Agreement, the
maturity of the Revolving O&G Development Loan was extended to October 9, 2010
and the maturity of the Original Term Loan (whose outstanding principal balance
as of September 11, 2009 was $28,250,000) was extended to January 11, 2012.
     I. The Debtor has requested that Lender agree to (i) permit Quest Eastern
Resource LLC to assume, as borrower, the indebtedness owing under the Second
Amended and Restated Credit Agreement and in connection therewith to release
(a) the Debtor from any liability or obligation to repay amounts owing under the
Second Amended and Restated Credit Agreement and (b) each of Quest Mergersub,
Inc., Quest Oil & Gas, LLC and Quest Energy Service, LLC from their respective
guarantees of the indebtedness owing under the Second Amended and Restated
Credit Agreement and from their respective mortgages and security agreements,
(ii) renew, extend and rearrange the indebtedness outstanding under the Second
Amended and Restated Credit Agreement resulting in a renewal term loan in the
aggregate principal amount of $43,760,206.42 , (iii) release the liens on all
the Collateral owned by the companies described in subsection (b) above, and
(iv) agree to amend and restate the Second Amended and Restated Credit Agreement
in its entirety, and Lender, subject to certain terms and conditions, has agreed
to the requests set forth above.
     J. Pursuant to an Assumption Agreement of even date herewith between
Debtor, as assignor, and Quest Eastern Resource LLC, as assignee, which was
consented to by Administrative Agent and Lender, Quest Eastern Resource LLC
assumed all of Debtor’s rights, interests, liabilities and obligations as
“Borrower” under the Second Amended and Restated Credit Agreement (Quest Eastern
Resource LLC herein referred to as “Borrower”).
     K. Pursuant to a Third Amended and Restated Credit Agreement of even date
herewith (the “Credit Agreement”), Borrower, Administrative Agent and Lender
have agreed to amend and restate in its entirety the Second Amended and Restated
Credit Agreement on the terms and conditions set forth therein and to renew,
rearrange and extend the indebtedness outstanding under the Second Amended and
Restated Credit Agreement (but not to repay or payoff such Indebtedness).
     L. Debtor has duly authorized the execution, delivery and performance of
this Security Agreement and it is in the best interests of Debtor to execute
this Security Agreement.
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     M. This Security Agreement is integral to the transactions contemplated by
the Loan Documents, and the execution and delivery of this Security Agreement is
required under the terms of the Credit Agreement.
     ACCORDINGLY, for valuable consideration, the receipt and adequacy of which
are hereby acknowledged, Debtor and Secured Party hereby agree as follows:
ARTICLE I
Definitions and References
     Section 1.1. Intentionally Omitted.
     Section 1.2. Certain Definitions. Unless otherwise defined herein, or the
context hereof otherwise requires, each term defined in the Credit Agreement or
in the UCC is used in this Security Agreement with the same meaning; provided
that, if the definition given to such term in the Credit Agreement conflicts
with the definition given to such term in the UCC, the definition in the Credit
Agreement shall control to the extent legally allowable; and if any definition
given to such term in Chapter 9 of the UCC conflicts with the definition given
to such term in any other chapter of the UCC, the Chapter 9 definition shall
prevail.
     Section 1.3. Certain Definitions. Definitions in this Security Agreement
The following terms have the following meanings unless otherwise indicated:
     Borrower has the meaning specified in Recital J.
     Collateral means, with respect to Debtor, all property described in
Section 2.1 in which Debtor has any right, title or interest.
     Credit Agreement has the meaning specified in Recital K.
     Debtor has the meaning specified in the preamble.
     First Amended and Restated Credit Agreement
     Issuer has the meaning specified in Section 2.1.
     Original Credit Agreement has the meaning specified in Recital A.
     Original Term Loan has the meaning specified in Recital E.
     Pledged Equity has the meaning specified in Section 2.1.
     Release Date shall mean the earliest of (i) the date upon which this
Agreement and its Liens are released pursuant to Section 10.01(c) of the Credit
Agreement or otherwise; (ii) the date upon which the Obligations are paid in
full; (iii) the date upon which the Obligations are satisfied or discharged in
accordance with the term of the Asset Sale Agreement, and (iv) the date upon
which the Lender owns the Pledged Equity whether by foreclosure or Debtor’s
transfer of the Pledged Equity to the Lender.
     Revolving O&G Development Loan has the meaning specified in Recital G.
     Quest Eastern Guaranty has the meaning specified in Recital F.
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     Second Amended and Restated Credit Agreement has the meaning specified in
Recital G.
     “Secured Party” has the meaning specified in the preamble.
     “Securities Act” means the Securities Act of 1933.
     “Security Agreement” has the meaning specified in the preamble.
     Well Bore Assignment has the meaning specified in Recital D.
     “UCC” means the Uniform Commercial Code in effect in the State of New York
from time to time; provided that, if perfection or the effect of perfection or
non-perfection or the priority of any security interest in any Collateral is
governed by the Uniform Commercial Code as in effect in a jurisdiction other
than the State of New York, “UCC” means the Uniform Commercial Code as in effect
from time to time in such other jurisdiction for purposes of the provisions
hereof relating to such perfection, effect of perfection or non-perfection or
priority.
ARTICLE II
Security Interest
     Section 2.1. Grant of Security Interest. As collateral security for the
payment and performance of all Obligations, Debtor pledges, collaterally assigns
and grants to Secured Party a continuing security interest in all right, title
and interest of Debtor in and to Debtor’s 100% limited liability company
interest in Quest Eastern ResourceLLC, a Delaware limited liability company (the
“Issuer”), whether such equity interest is now owned or existing or hereafter
acquired or arising, whether such equity is a General Intangible or a security,
and all equity that Debtor may acquire in the future that is issued by Issuer
and all proceeds of the foregoing (collectively, the “Pledged Equity”).
     Section 2.2. Obligations Secured.
     (a) The security interest created hereby in the Collateral secures the
payment and performance of all Obligations.
     (b) Without limiting the generality of the foregoing, this Security
Agreement secures, as to Debtor, the payment of all amounts that constitute part
of the Obligations and would be owed by the Borrower to the Lender under the
Loan Documents (as defined in the Credit Agreement) but for the fact that they
are unenforceable or not allowable due to the existence of a bankruptcy,
reorganization or similar proceeding involving the Borrower.
ARTICLE III
Representations and Warranties
      Section 3.1. Representations and Warranties. Debtor represents and
warrants to Secured Party as follows:
     (a) Debtor has and will have at all times the right, power and authority to
grant to Secured Party as provided herein a security interest in the Collateral,
free and clear of any Lien, except for Permitted Liens. This Security Agreement
creates a valid and binding security interest in favor of Secured Party in the
Collateral, securing the Obligations.
     (b) With respect to Pledged Equity:
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     (i) All units constituting Pledged Equity have been duly authorized and
validly issued, and, as applicable, are fully paid and non-assessable, and were
not issued in violation of the preemptive rights of any Person or of any
agreement by which Debtor or the Issuer is bound.
     (ii) All documentary, stamp or other taxes or fees owing in connection with
the issuance, transfer or pledge of any Pledged Equity (or rights in respect
thereof) have been paid.
     (iii) Other than as set forth herein, in the Credit Agreement, or under
applicable federal or state securities Laws, no restriction or condition exists
with respect to the transfer, voting or capital of any Pledged Equity.
     (iv) Issuer has no outstanding subscription agreement, option, warrant or
convertible security outstanding or any other right outstanding pursuant to
which any Person (as defined in the Credit Agreement) would be entitled to have
issued to it units of ownership interest in Issuer.
     (v) Debtor has taken or concurrently herewith is taking all actions
necessary to perfect Secured Party’s security interest in Pledged Equity,
including making any registration, filing or notice that may be necessary or
advisable under Articles 8 or 9 of the Uniform Commercial Code as in effect in
the jurisdiction in which the Issuer of such Pledged Equity was organized, and
no other Person has any such registration, filing or notice in effect with
respect to the Pledged Equity.
     (vi) Debtor has delivered a correct and complete copy of the Issuer’s
limited liability company agreement to Secured Party.
     (vii) Neither the execution, delivery or performance of this Security
Agreement nor the exercise of any right or remedy of Secured Party hereunder
will cause a default under any agreement in respect of Pledged Equity to which
Debtor or Issuer is a party or otherwise adversely affect or diminish any
Pledged Equity.
     (viii) Debtor’s rights under any agreement in respect of Pledged Equity are
enforceable in accordance with their terms, except as such enforcement may be
limited by bankruptcy, insolvency or similar laws of general application
relating to the enforcement of creditors’ rights.
     (ix) Debtor has delivered to Secured Party to the extent such Pledged
Equity is uncertificated, an executed Acknowledgment of Pledge in the form of
Annex A with respect to such Pledged Equity.
     (c) The Pledged Equity constitutes all equity interests in the Issuer owned
by Debtor as of the date hereof. Debtor has delivered to Secured Party all
certificates evidencing such Pledged Equity, duly indorsed, or accompanied by
unit powers duly indorsed, in blank for transfer.
     (d) Debtor is a corporation and is organized under the laws of the State of
Delaware, which is Debtor’s location pursuant to the UCC. Debtor does not
presently conduct business under any name except the name in which it has
executed this Security Agreement, which is the exact name that appears in
Debtor’s organizational documents. Debtor’s only other names during the five
year period prior to the date of this Security Agreement are the names listed in
the preamble.
     (e) Debtor has good and marketable title to the Collateral, free and clear
of all Liens, except (i) for the security interest created by this Security
Agreement, and (ii) Permitted Liens. No effective financing statement or other
registration or instrument similar in effect covering any Collateral is on file
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in any recording office except any that have been filed in favor of Secured
Party relating to this Security Agreement.
     (f) Neither the ownership or intended use of the Collateral by Debtor, nor
the grant of the security interest by Debtor to Secured Party hereunder:
     (i) conflicts with:
     (A) any applicable domestic or foreign Law,
     (B) any organizational document of Debtor or the Issuer; or
     (C) any agreement, judgment, license, order or permit applicable to or
binding upon Debtor or the Issuer, or
     (ii) results in or requires the creation of any Lien, charge or encumbrance
upon any asset of Debtor except for the security interest granted by Debtor to
Secured Party hereunder.
     (g) There is no condition precedent to the effectiveness of this Security
Agreement that has not been satisfied or waived.
     (h) The direct or indirect value of the consideration received and to be
received by Debtor in connection herewith is reasonably worth at least as much
as the liability of Debtor hereunder , and the incurrence of such liability in
return for such consideration may reasonably be expected to benefit Debtor,
directly or indirectly. Debtor is not “insolvent” on the date hereof after
giving effect to the transactions contemplated hereunder as such term is used
and defined in (i) the United States Bankruptcy Code and (ii) the New York
Uniform Fraudulent Transfer Act.
ARTICLE IV
Covenants
     Section 4.1. General Covenants. Debtor will, so long as this Security
Agreement shall be in effect, perform and observe the following:
     (a) Without limitation of any other covenant herein, Debtor shall not cause
or permit any change in its name, identity or organizational structure, or any
change to its jurisdiction of organization, unless Debtor shall have first:
     (i) notified Secured Party of such change at least 30 days prior to the
effective date of such change (or such shorter notice as Secured Party may
approve),
     (ii) taken all action requested by Secured Party (under the following
subsection (b) or otherwise) for the purpose of further confirming and
protecting Secured Party’s security interest and rights under this Security
Agreement and the perfection and priority thereof, and
     (iii) if reasonably requested by Secured Party, provided to Secured Party a
legal opinion to Secured Party’s satisfaction confirming that such change shall
not adversely affect Secured Party’s security interest and rights under this
Security Agreement or the perfection or priority of such security interest.
In any notice delivered pursuant to this subsection, Debtor will expressly state
that the notice is required by this Security Agreement and contains facts that
may require additional filings of financing statements
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or other notices for the purposes of continuing perfection of Secured Party’s
security interest in the Collateral.
     (b) Debtor will, at its expense and as from time to time reasonably
requested by Secured Party, promptly execute and deliver all further
instruments, agreements, filings and registrations, and take all further action,
in order:
     (i) to confirm and validate this Security Agreement and Secured Party’s
rights and remedies hereunder,
     (ii) to correct any error or omission in the description herein of the
Obligations or the Collateral or in any other provision hereof,
     (iii) to perfect, register and protect the security interest and rights
created or purported to be created hereby or to maintain the required priority
of such security interests and rights,
     (iv) to enable Secured Party to exercise and enforce its rights and
remedies hereunder, or
     (v) otherwise to give Secured Party the full benefits of the rights and
remedies described in or granted under this Security Agreement.
As part of the foregoing, Debtor will, whenever requested by Secured Party:
     (A) execute (as applicable) and file any financing statement, continuation
statement or other filing or registration relating to Secured Party’s security
interest and rights hereunder, and any amendment thereto, and
     (B) mark its books and records relating to any Collateral to reflect that
such Collateral is subject to this Security Agreement and the security interests
hereunder.
     (c) Debtor will:
     (i) Maintain good and marketable title to all Collateral, free and clear of
all Liens and not grant or allow any such Lien to exist except for the security
interest created by this Security Agreement, (ii) Permitted Liens.
     (ii) Not allow to remain in effect, and cause to be terminated, any
financing statement or other registration or instrument similar in effect
covering any Collateral, except (i) any that has been filed in favor of Secured
Party relating to this Security Agreement, and (ii) Permitted Liens.
     (iii) Defend Secured Party’s right, title and security interest in and to
the Collateral against the claims of any Person.
     (d) Debtor shall not take any action that would, or fail to take any action
if such failure would, impair the enforceability, perfection or priority of
Secured Party’s security interest in any Collateral.
     Section 4.2. Covenants Relating Specifically to the Nature of the
Collateral. Debtor will, until the Release Date, perform and observe the
following:
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     (a) If Debtor shall at any time hold or acquire any certificated security
evidencing Collateral, Debtor will forthwith endorse, assign, and deliver the
same to Secured Party, accompanied by such instruments of transfer or assignment
duly executed in blank as Secured Party may from time to time specify.
     (i) If any security evidencing Collateral now or hereafter acquired by
Debtor is uncertificated and is issued to Debtor or its nominee directly by the
issuer thereof, Debtor shall immediately notify Secured Party of such issuance
and, pursuant to an agreement in form and substance satisfactory to Secured
Party, cause the issuer thereof to agree to comply with instructions from
Secured Party as to such security, without further consent of Debtor or such
nominee, or take such other action as Secured Party may approve in order to
perfect Secured Party’s security interest in such security.
     (ii) If any security, whether certificated or uncertificated, or other
Investment Property now or hereafter acquired by Debtor and evidencing
Collateral, is held by Debtor or its nominee through a securities intermediary,
Debtor shall immediately notify Secured Party thereof, and, at Secured Party’s
request and option, pursuant to an agreement in form and substance satisfactory
to Secured Party, either:
     (A) cause such securities intermediary to agree to comply with entitlement
orders or other instructions from Secured Party to such securities intermediary
as to such securities or other Investment Property, in each case without further
consent of Debtor or such nominee, or
     (B) in the case of financial assets or other Investment Property held
through a securities intermediary, arrange for Secured Party to become the
entitlement holder with respect to such Investment Property, with Debtor being
permitted to exercise rights to withdraw or otherwise deal with such Investment
Property.
Subsections (A) and (B) above shall not apply to any financial asset credited to
a Securities Account for which Secured Party is the securities intermediary or
commodity intermediary.
     (iii) Debtor shall not permit any Pledged Equity that is an equity interest
in a limited liability company or a limited partnership and that is a General
Intangible to become Investment Property unless it shall have given Secured
Party at least 30-days’ prior notice (or such shorter notice as Secured Party
may approve) and shall have taken such steps as Secured Party shall request in
connection with the perfection or priority of Secured Party’s security interest
therein as provided in subsections (i) and (ii) above.
     (iv) Debtor shall not:
     (A) adjust, settle, compromise, amend or modify any right in respect of any
Pledged Equity or any agreement relating thereto except for any adjustment,
settlement, modification, compromise or amendment that would not materially
adversely affect the Secured Party’s rights hereunder;
     (B) permit the creation of any additional equity interest in the Issuer,
unless immediately upon creation the same is pledged to Secured Party pursuant
hereto to the extent necessary to give Secured Party a first-priority security
interest in such Pledged Equity after such creation that is in the aggregate at
least the same percentage of such Pledged Equity as was subject hereto before
such issue, whether such additional interest is presently vested or will vest
upon the payment of money or the occurrence or non-occurrence of any other
condition; or
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     (C) enter into any agreement, other than the Loan Documents, creating, or
otherwise permit to exist, any restriction or condition upon the transfer or
exercise of any rights in respect of any Pledged Equity, including any
restriction or condition upon the transfer, voting or control of any Pledged
Equity.
ARTICLE V
Voting and Distribution Rights in Respect Of Pledged Equity
     Section 5.1. Voting Rights. Debtor shall be entitled to exercise all voting
and other consensual rights pertaining to the Pledged Equity or any part thereof
for any purpose; provided that Debtor shall not exercise or refrain from
exercising any such right if such action would have a material adverse effect on
the value of any Pledged Equity or on Secured Party’s security interest or the
value thereof; and provided further that, upon the occurrence and during the
continuance of an Event of Default, upon notice from Secured Party to Debtor,
all rights to exercise or refrain from exercising the voting and other
consensual rights that Debtor would otherwise be entitled to exercise shall
cease and all such rights shall thereupon become vested in Secured Party, which
thereupon shall have the sole right to exercise or refrain from exercising such
voting and other consensual rights.
     Section 5.2. Dividends. Except as permitted under the Credit Agreement,
Debtor shall not be entitled to receive or retain any dividends, interest and
other distributions paid in respect of the Pledged Equity while the Obligations
remain outstanding.
ARTICLE VI
Remedies, Powers and Authorizations
     Section 6.1. Normal Provisions Concerning the Collateral.
     (a) Debtor irrevocably authorizes Secured Party at any time and from time
to time to file, without the signature of Debtor, in any jurisdiction any
amendments to existing financing statements and any initial financing statements
and amendments thereto that:
     (i) indicate the nature of the Collateral;
     (ii) contain any other information required for the sufficiency or filing
office acceptance of any financing statement or amendment, including whether
Debtor is an organization, the type of organization and any organization
identification number issued to Debtor; and
     (iii) properly effectuate the transactions described in the Loan Documents,
as determined by Secured Party in its discretion.
Debtor will furnish any information described in items (i) — (iii) above to
Secured Party promptly upon request. A carbon, photographic or other
reproduction of this Security Agreement or any financing statement describing
any Collateral is sufficient as a financing statement and may be filed in any
jurisdiction by Secured Party. Debtor ratifies and approves all financing
statements heretofore filed by or on behalf of Secured Party in any jurisdiction
in connection with the transactions contemplated hereby.
     (b) Effective upon and during the continuance of an Event of Default,
Debtor appoints Secured Party as Debtor’s attorney in fact and proxy, with full
authority in the place and stead of Debtor and in the name of Debtor or
otherwise, from time to time in Secured Party’s discretion, to take any action
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and to execute any instrument that Secured Party may deem necessary or advisable
to accomplish the purposes of this Security Agreement including any action or
instrument:
     (i) to ask for, demand, collect, sue for, recover, compound, receive and
give acquittance and receipts for moneys due and to become due under or in
respect of any Collateral;
     (ii) to receive, indorse and collect any drafts or other Instruments or
Documents with respect to any Collateral;
     (iii) to enforce any obligations included in the Collateral; and
     (iv) to file any claims or take any action or institute any proceedings
that Secured Party may deem necessary or desirable for the collection of any
Collateral or otherwise to enforce the rights of Debtor or Secured Party with
respect to any Collateral.
Such power of attorney and proxy are coupled with an interest, are irrevocable,
and are to be used by Secured Party for the sole benefit of the Secured Party.
     (c) If Debtor fails to perform any agreement or obligation contained
herein, Secured Party may, but shall have no obligation to, itself perform, or
cause performance of, such agreement or obligation, and the expenses of Secured
Party incurred in connection therewith shall be payable by Debtor under
Section 6.6.
     (d) Secured Party shall have the right, upon and during the continuance of
an Event of Default, at any time in its discretion and without notice to Debtor,
to transfer to or to register in the name of Secured Party or any of its
nominees any Pledged Equity, subject only to the revocable rights specified in
Section 5.1. Debtor shall forthwith, upon and during the continuance of an Event
of Default, cause all Pledged Equity in which it has an interest on the date
hereof to be registered in the name of Secured Party or such of Secured Party’s
nominees as Secured Party shall direct, and, upon Debtor’s acquisition of any
interest in any Pledged Equity in the future, forthwith cause the same to be so
registered.
     (e) Anything herein to the contrary notwithstanding, prior to such time as
Secured Party or other purchaser of the Collateral succeeds to Debtor’s rights
as owner of the Collateral whether pursuant to foreclosure or otherwise:
     (i) Debtor shall remain liable to perform all duties and obligations under
the agreements included in the Collateral to the same extent as if this Security
Agreement had not been executed.
     (ii) The exercise by Secured Party of any right hereunder shall not release
Debtor from any duty or obligation under any agreement included in the
Collateral.
     (iii) Secured Party shall not have any obligation or liability under the
agreements in respect of the Collateral by reason of this Security Agreement or
any other Loan Document, nor shall Secured Party be obligated to perform any
duty or obligation of Debtor thereunder or take any action to collect or enforce
any claim for payment assigned hereunder.
     Section 6.2. Event of Default Remedies. If an Event of Default shall have
occurred and be continuing, Secured Party may from time to time in its
discretion, without limitation and without notice except as expressly provided
below:
     (a) Exercise in respect of the Collateral, in addition to any other right
and remedy provided for herein, under the other Loan Documents, or otherwise
available to it, all the rights and remedies of a
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secured party on default under the UCC (whether or not the UCC applies to the
affected Collateral) and any other applicable law.
     (b) Require Debtor to, and Debtor will at its expense and upon request of
Secured Party forthwith, assemble all or part of the Collateral as directed by
Secured Party and make it (together with all books, records and information of
Debtor relating thereto) available to Secured Party at a place to be designated
by Secured Party that is reasonably convenient to both parties.
     (c) Prior to the disposition of any Collateral:
     (i) to the extent permitted by applicable Law, enter, with or without
process of law and without breach of the peace, any premises where any
Collateral is or may be located, and without charge or liability to Secured
Party seize and remove such Collateral from such premises, and
     (ii) have access to and use the Company’s books, records, and information
relating to the Collateral.
     (d) Reduce its claim to judgment or foreclose or otherwise enforce, in
whole or in part, the security interest created hereby by any available judicial
procedure.
     (e) Dispose of, at its office, on the premises of Debtor or elsewhere, any
Collateral, as a unit or in parcels, by public or private proceedings, and by
way of one or more contracts (but the sale of any Collateral shall not exhaust
Secured Party’s power of sale, and sales may be made from time to time, and at
any time, until all of the Collateral has been sold or until the Obligations
have been paid and performed in full), and at any such sale it shall not be
necessary to exhibit any Collateral.
     (f) Buy (or allow Secured Party to buy) Collateral, or any part thereof, at
any public sale.
     (g) Buy (or allow Secured Party to buy) Collateral, or any part thereof, at
any private sale if any Collateral is of a type customarily sold in a recognized
market or is of a type that is the subject of widely distributed standard price
quotations.
     (h) Apply by appropriate judicial proceedings for appointment of a receiver
for the Collateral, or any part thereof, and Debtor consents to any such
appointment.
     (i) Comply with any applicable state or federal Law requirement in
connection with a disposition of Collateral and such compliance shall not be
considered to affect adversely the commercial reasonableness of any sale of
Collateral.
     (j) Sell Collateral without giving any warranty, with respect to title or
any other matter.
     (k) To the extent notice of sale shall be required by law with respect to
Collateral, at least ten (10) Business Days’ notice to Debtor of the time and
place of any public sale or the time after which any private sale is to be made
shall constitute reasonable notification; provided that, if Secured Party fails
in any respect to give such notice, its liability for such failure shall be
limited to the liability (if any) imposed on it by law under the UCC. Secured
Party shall not be obligated to make any sale of Collateral regardless of notice
of sale having been given. Secured Party may adjourn any public or private sale
from time to time by announcement at the time and place fixed therefor, and such
sale may, without further notice, be made at the time and place to which it was
so adjourned.
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     Section 6.3. Application of Proceeds. If an Event of Default shall have
occurred and be continuing, any cash held by or on behalf of Secured Party and
all cash proceeds received by or on behalf of Secured Party in respect of any
sale of, collection from, or other realization upon any Collateral may, in the
discretion of Secured Party, be held by Secured Party as collateral for, and/or
then or at any time thereafter applied in whole or in part by Secured Party
against, any Obligation, in the following manner:
     (a) First, to Secured Party for any amounts then owing to Secured Party for
costs or expenses incurred by Secured Party in connection therewith.
     (b) Second, to Secured Party in repayment of the Obligations.
     (c) Third, any surplus of such cash or cash proceeds held by or on the
behalf of Secured Party and remaining after payment in full of all the
Obligations shall be paid over to the Debtor or to whatever Person may be
lawfully entitled to receive such surplus.
     Section 6.4. Private Sales of Pledged Equity. Secured Party may deem it
impracticable to effect a public sale of any Pledged Equity and may determine to
make one or more private sales of such Pledged Equity to a restricted group of
purchasers that will be obligated to agree, among other things, to acquire the
same for their own account, for investment and not with a view to the
distribution or resale thereof. Any such private sale may be at a price and on
other terms less favorable to the seller than the price and other terms that
might have been obtained at a public sale. Any such private sale nevertheless
shall be deemed to have been made in a commercially reasonable manner, and
Secured Party shall not have any obligation to delay sale of any such Pledged
Equity for the period of time necessary to permit their registration for public
sale under the Securities Act. Any offer to sell any such Collateral that has
been:
     (i) publicly advertised on a bona-fide basis in a newspaper or other
publication of general circulation in the financial communities of New York, New
York, Houston, Texas and Oklahoma City, Oklahoma (to the extent that such an
offer may be so advertised without prior registration under the Securities Act),
or
     (ii) made privately in the manner described above to not less than 15
bona-fide offerees,
     (iii) shall be deemed to involve a “public disposition” under
Chapter 9.610(c) of the UCC, notwithstanding that such sale may not constitute a
“public offering” under the Securities Act, and Secured Party may bid for such
Collateral.
     Section 6.5. Non-Judicial Remedies. In granting to Secured Party the power
to enforce its rights hereunder without prior judicial process or judicial
hearing, to the extent permitted by applicable Law, Debtor waives, renounces and
knowingly relinquishes any legal right that might otherwise require Secured
Party to enforce its rights by judicial process and confirms that such remedies
are consistent with the usage of trade, are responsive to commercial necessity
and are the result of a bargain at arm’s length. Secured Party may, however, in
its discretion, resort to judicial process.
     Section 6.6. Limitation on Duty of Secured Party in Respect of Collateral.
Beyond the exercise of reasonable care in the custody thereof, Secured Party
shall have no duty as to any Collateral in its possession or control or in the
possession or control of any agent or bailee or as to the preservation of rights
against prior parties or any other rights pertaining thereto. Secured Party
shall be deemed to have exercised reasonable care in the custody of Collateral
in its possession if such Collateral is accorded treatment substantially equal
to that which it accords its own property, and Secured Party shall not be liable
or responsible for any loss or damage to any Collateral, or for any diminution
in the value thereof,
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by reason of the act or omission of any warehouseman, carrier, forwarding
agency, consignee or other agent or bailee selected by Secured Party in good
faith.
ARTICLE VII
Miscellaneous
     Section 7.1. Notices. Any notice or communication required or permitted
hereunder shall be given in writing or by electronic transmission, sent in the
manner provided in the Credit Agreement, if to Secured Party, to the address set
forth in the Credit Agreement and for Debtor, to the address specified in the
preamble to this Security Agreement, or to such other address or to the
attention of such other individual as hereafter shall be designated in writing
by the applicable party sent in accordance herewith. Any such notice or
communication shall be deemed to have been given as provided in the Credit
Agreement for notices given thereunder.
     Section 7.2. Amendments and Waivers. Except as provided in Section 7.3, no
amendment of this Security Agreement shall be effective unless it is in writing
and signed by Debtor and Secured Party, and no waiver of this Security Agreement
or consent to any departure by Debtor herefrom shall be effective unless it is
in writing and signed by Secured Party, and then such waiver or consent shall be
effective only in the specific instance and for the specific purpose for that
given and to the extent specified in such writing. In addition, all such
amendments and waivers shall be effective only if given with the necessary
approvals required in the Credit Agreement.
     Section 7.3. Preservation of Rights. No failure on the part of Secured
Party to exercise, and no delay in exercising, any right hereunder or under any
other Loan Document shall operate as a waiver thereof; nor shall any single or
partial exercise of any such right preclude any other or further exercise
thereof or the exercise of any other right. The rights and remedies of Secured
Party provided herein and in the other Loan Documents are cumulative and are in
addition to, and not exclusive of, any rights or remedies provided by Law or
otherwise.
     Section 7.4. Severability. Any provision of this Security Agreement that is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or invalidity without
invalidating the remaining portions hereof or thereof or affecting the validity
or enforceability of such provision in any other jurisdiction.
     Section 7.5. Survival. Each representation and warranty, covenant and other
obligation of Debtor herein shall survive the execution and delivery of this
Security Agreement, the execution and delivery of any other Loan Document and
the creation of the Obligations.
     Section 7.6. Binding Effect and Assignment. This Security Agreement shall:
     (a) be binding on Debtor and its successors and permitted assigns, and
     (b) inure, together with all rights and remedies of Secured Party
hereunder, to the benefit of Secured Party and its successors, transferees and
permitted assigns.
Without limiting the generality of the foregoing, Secured Party may (except as
otherwise provided in any Loan Document) pledge, assign or otherwise transfer
any right under any Loan Document to any other Person, and such other Person
shall thereupon become vested with all benefits in respect thereof granted
herein or otherwise. No right or duty of Debtor hereunder may be assigned or
otherwise transferred without the prior written consent of Secured Party.
     Section 7.7. Release of Collateral; Termination.
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     (a) Upon any sale, lease, transfer or other disposition of any Collateral
of Debtor in accordance with the Loan Documents or the Asset Sale Agreement,
Secured Party will, at Debtor’s expense, execute and deliver to Debtor such
documents as Debtor shall reasonably request to evidence the release of such
Collateral from the assignment and security interest granted hereby; provided
that:
     (i) Debtor shall have complied with the notice requirements and the other
requirements of Section 10.01(b) of the Credit Agreement and any applicable
provisions of the Asset Sale Agreement, and
     (ii) if any Loan Document provides for any application of the proceeds of
any such sale, lease, transfer or other disposition, or any payment to be made,
in connection therewith, such proceeds shall have been applied or payment made
as provided therein.
     (b) Upon, and only upon the indefeasible payment and satisfaction in full
in cash of the Obligations or the satisfaction and discharge of the Obligations
pursuant to the Asset Sale Agreement,, this Security Agreement and the security
interest created hereby shall terminate, all rights in the Collateral shall
revert to Debtor and Secured Party, at a Debtor’s request and at its expense,
will:
     (i) return to Debtor such of Debtor’s Collateral in Secured Party’s
possession as shall not have been sold or otherwise disposed of or applied
pursuant to the terms hereof, and
     (ii) execute and deliver to Debtor such documents as Debtor shall
reasonably request to evidence such termination.
     (c) Debtor is not authorized to file any financing statement or amendment
or termination statement with respect to any financing statement originally
filed in connection with this Security Agreement without the prior written
consent of Secured Party, subject to Debtors’ rights under Chapters 9.509(d)(2)
and 9.518 of the UCC.
     Section 7.8. Governing Law. This Security Agreement shall be governed by
and construed in accordance with the laws of the State of New York.
     Section 7.9. Final Agreement. This Security Agreement and the other Loan
Documents represent the final agreement between the parties hereto and may not
be contradicted by evidence of prior, contemporaneous, or subsequent oral
agreements of the parties hereto. There are no unwritten oral agreements between
the parties hereto.
     Section 7.10. Counterparts; Facsimile. This Security Agreement may be
executed in any number of counterparts (and by different parties hereto in
different counterparts), each of which when so executed shall be deemed to be an
original and all of which when taken together shall constitute one and the same
agreement. Delivery of an executed counterpart of a signature page of this
Security Agreement by telecopy, facsimile, photocopy or by sending a scanned
copy by electronic mail shall be effective as delivery of a manually executed
counterpart of this Security Agreement.
     Section 7.11. Acceptance by Secured Party. By its acceptance of the
benefits hereof, Secured Party shall be deemed to have agreed to be bound hereby
and to perform any obligation on its part set forth herein.
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     IN WITNESS WHEREOF, Debtor has executed and delivered this Security
Agreement as of the date first-above written.

              DEBTOR:   POSTROCK ENERGY SERVICES CORPORATION,
a Delaware corporation    
 
           
 
  By:   /s/ David C. Lawler    
 
     
 
David C. Lawler    
 
      President and Chief Executive Officer    

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ANNEX A TO PLEDGE AND SECURITY AGREEMENT
ACKNOWLEDGMENT OF PLEDGE
LIMITED LIABILITY COMPANY: QUEST EASTERN RESOURCE LLC
INTEREST OWNER: POSTROCK ENERGY SERVICES CORPORATION
     BY THIS ACKNOWLEDGMENT OF PLEDGE, dated as of September 21, 2010, QUEST
EASTERN RESOURCE LLC (the “Limited Liability Company”) hereby acknowledges the
pledge in favor of Royal Bank of Canada (“Pledgee”), in its capacity as
Administrative Agent and Collateral Agent for Lender and as Secured Party under
that certain Pledge and Security Agreement dated as of September 21, 2010 (as
amended, modified, supplemented, or restated from time to time, the “Security
Agreement”), against, and a security interest in favor of Pledgee in, all of
POSTROCK ENERGY SERVICES CORPORATION’s (the “Interest Owner”) Rights in
connection with any membership interest in the Limited Liability Company now and
hereafter owned by the Interest Owner (“Limited Liability Company Interest”).
     A. Pledge Records. The Limited Liability Company has identified Pledgee’s
interest in all of the Interest Owner’s Right, title, and interest in and to all
of the Interest Owner’s Limited Liability Company Interest as subject to a
pledge and security interest in favor of Pledgee in the Limited Liability
Company records.
     B. Limited Liability Company Distributions, Accounts, and Correspondence.
The Limited Liability Company hereby acknowledges that (i) all proceeds,
distributions, and other amounts payable to the Interest Owner, including,
without limitation, upon the termination, liquidation, and dissolution of the
Limited Liability Company shall be paid and remitted to the Pledgee upon demand,
(ii) all funds in deposit accounts shall be held for the benefit of Pledgee, and
(iii) all future correspondence, accountings of distributions, and tax returns
of the Limited Liability Company shall be provided to the Pledgee. The Limited
Liability Company acknowledges and accepts such direction and hereby agrees that
it shall, upon the written demand by the Administrative Agent, pay directly to
the Administrative Agent at its offices at Royal Bank Plaza, P.O. Box 50, 200
Bay Street, 12th Floor, South Tower, Toronto, Ontario M5J 2W7 any and all
distributions, income, and cash flow arising from the Limited Liability Company
Interests whether payable in cash, property or otherwise, subject to and in
accordance with the terms and conditions of the Limited Liability Company
Agreement. The Pledgee may from time to time notify the Limited Liability
Company of any change of address to which such amounts are to be paid.
Remainder of Page Intentionally Blank.
Signature Page to Follow.
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     EXECUTED as of the date first stated in this Acknowledgment of Pledge.

                      QUEST EASTERN RESOURCE LLC,
a Delaware limited liability company    
 
                    By:   POSTROCK ENERGY SERVICES
CORPORATION, its sole member    
 
               
 
      By:        
 
         
 
David C. Lawler, President
and Chief Executive Officer    

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