**Exhibit10.3**

 

Execution Copy

 

**THIRDAMENDMENT TO CREDIT AGREEMENT**

 

This THIRD AMENDMENTTO CREDIT AGREEMENT (“Amendment”), dated as of September 30, 2008,is by and among **PINNACLE GAS RESOURCES, INC.**, aDelaware****corporation, the Lendersfrom time to time party hereto, and **THE ROYAL BANK OF SCOTLANDplc**, as Administrative Agent and as Issuer.

 

WHEREAS, theBorrower, the Lenders and the Administrative Agent are parties to that certainCredit Agreement (as amended by that certain Letter Regarding Waiver and Amendmentto Credit Agreement dated March 9, 2007 and the Second Amendment to CreditAgreement dated as of July 29, 2008 and as further amended andsupplemented from time to time, the “Credit Agreement); and

 

WHEREAS, theparties hereto desire to amend the Credit Agreement in certain respects as setforth herein;

 

NOW THEREFORE,in consideration of the premises and the mutual covenants, representations andwarranties contained herein, and for other good and valuable consideration, thereceipt and sufficiency of which are hereby acknowledged, the parties heretohereby agree as follows:

 

**AGREEMENT**

 

Section 1.                                           Definitions. Capitalized terms used herein but not defined herein shall have themeanings as given them in the Credit Agreement, unless the context otherwiserequires.

 

Section 2.                                           Amendments.

 

(a)                                 Section 1.1.  Section 1.1of the Credit Agreement is hereby amended as follows:

 

(i)                                    The definition of “Alternate Base Rate”is hereby amended and restated in its entirety as follows:

 

“**Alternate Base Rate**”means, on any date and with respect to all ABR Loans, a fluctuating rate ofinterest per annum (rounded upward, if necessary, to the next highest 1/16 of1%) equal to the highest of the then determinable of

 

(a)                                 the Base Rate in effect on such day;

 

(b)                                the Federal Funds Effective Date ineffect on such day plus 1⁄2 of 1%; and

 

(c)                                 the sum of 1.00% plus the one-month LIBORate as of 11:00 a.m. (London time) on such day.

 

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Changes in the rate of interest on thatportion of any Loans maintained as ABR Loans will take effect simultaneouslywith each change in the Alternate Base Rate. The Administrative Agent will give notice promptly to the Borrower andthe Lenders of changes in the Alternate Base Rate; provided that, the failureto give such notice shall not affect the Alternate Base Rate in effect aftersuch change.”

 

(ii)                                 the definition of “Applicable Margin” ishereby amended and restated in its entirety as follows:

 

“**Applicable Margin**” means, for any day and with respect toall Loans maintained as Eurodollar Loans or ABR Loans, the applicablepercentage set forth below corresponding to the Utilization Percentage Share:

 
| **If the Utilization  Percentage Share is:** | ** ** | **Then the Applicable  Margin for  Eurodollar Loans is:** | ** ** | **Then the Applicable  Margin for ABR  Loans is:** | ** ** | **Commitment  Fee is:** |
|------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|------------------------------|
| Greater than  or equal to 90%                                    |       | 3.0%                                                                               |       | 1.75%                                                                       |       | 0.50%                        |
| Greater than  or equal to 75% but less than 90%                  |       | 2.75%                                                                              |       | 1.50%                                                                       |       | 0.50%                        |
| Greater than  or equal to 50% but less than 75%                  |       | 2.50%                                                                              |       | 1.25%                                                                       |       | 0.50%                        |
| Greater than  or equal to 25% but less than 50%                  |       | 2.25%                                                                              |       | 1.00%                                                                       |       | 0.50%                        |
| Less than 25%                                                    |       | 2.00%                                                                              |       | 0.75%                                                                       |       | 0.50%                        |

 

If at any time the Borrower fails to delivera Reserve Report or Probable and Possible Report pursuant to Section 2.8.2or 2.8.3, then the “Applicable Margin” means the rate per annum setforth on the grid when the Utilization Percentage Share is at its highest leveluntil such time as such Reserve Report and such Probable and Possible Reporthave been delivered.

 

(iii)                              The definition of Current Assets is hereby amended andrestated in its entirety as follows:

 

“**Current Assets**”means, at any date, the current assets of the Borrower and its ConsolidatedSubsidiaries plus the aggregate Unused Commitments which would be availablepursuant to Section 5.1, exclusive of the current portion of themark-to-market value of assets constituting commodity derivative instruments asreflected on the Borrower’s consolidated balance sheet.

 

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(iv)                             The definition of Current Liabilities ishereby amended and restated in its entirety as follows:

 

“**Current Liabilities**”means, at any date, the current liabilities of the Borrower and itsConsolidated Subsidiaries, exclusive of the current portion of the Loans andLetters of Credit hereunder and exclusive of the current portion of themark-to-market value of liabilities constituting commodity derivativeinstruments as reflected on the Borrower’s consolidated balance sheet.

 

(b)                                Section 5.1.2.  Section 5.1.2of the Credit Agreement is hereby amended and restated in its entirety as follows:

 

5.1.2                       the factthat, immediately before such requested Credit Extension, no Default shall haveoccurred and be continuing and that the making of any such Credit Extensionwill not cause a Default, including, for clarification, the fact that the makingof such Credit Extension shall not cause, nor with the passage of time beexpected to cause, a breach of the financial covenants included in 7.15.3,7.15.4, or 7.15.5 as of the time of such Credit Extension and the fact thatimmediately before the making of such requested Credit Extension, ratio of theBorrower’s Current Assets to its Current Liabilities (as of the time of therequest for such Credit Extension) is no less than 1.00 to 1.00.

 

Section 3.                                           Waiver.  TheAdministrative Agent and the Lenders hereby waive the requirement in Section 7.15.2of the Credit Agreement that the Borrower not permit the ratio of its CurrentAssets to its Current Liabilities to be less than 1.00 to 1.00 for the fiscalquarter ending September 30, 2008. The waiver in this Section 3 is effective only for thefiscal quarter ending September 30, 2008 and not any other fiscal quarter.

 

Section 4.                                           Conditions to Effectiveness. This Amendment shall be deemed effective as of the date hereof followingthe satisfaction of the following conditions:

 

(a)                                 the Administrative Agent shall havereceived counterparts hereof duly executed by the Borrower, the AdministrativeAgent, and the Required Lenders; and

 

(b)                                the Administrative Agent shall havereceived an amendment fee in an amount equal to Thirty-Six Thousand Two HundredFifty Dollars ($36,250) for the account of the Administrative Agent.

 

Section 5.                                           Representations and Warranties. The Borrower hereby represents and warrants that after giving effecthereto:

 

(a)                                 the representations and warranties of theBorrower and each Subsidiary contained in the Loan Documents are true andcorrect in all material respects on and as of the date hereof, other than thoserepresentations and warranties that expressly relate solely to a specific earlierdate, which shall remain correct in all material respects as of such earlierdate;

 

(b)                                the execution, delivery and performanceby the Borrower and each Subsidiary of this Amendment has been duly authorizedby all necessary corporate action

 

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required on their partand this Amendment, along with the Credit Agreement as amended hereby and otherLoan Documents, constitutes the legal, valid and binding obligation of eachObligor party thereto enforceable against them in accordance with its terms,except as its enforceability may be affected by the effect of bankruptcy,insolvency, reorganization, moratorium or other similar laws now or hereafterin effect relating to or affecting the rights or remedies of creditorsgenerally;

 

(c)                                 neither the execution, delivery andperformance of this Amendment by the Borrower and each Subsidiary, theperformance by them of the Credit Agreement nor the consummation of thetransactions contemplated hereby does or shall contravene, result in a breachof, or violate (i) any provision of the Borrower or any Subsidiary’scertificate or articles of incorporation or bylaws or other similar documents,or agreements, (ii) any law or regulation, or any order or decree of anycourt or government instrumentality, or (iii) any indenture, mortgage,deed of trust, lease, agreement or other instrument to which the Borrower orany of its Subsidiaries is a party or by which the Borrower or any of itsSubsidiaries or any of their property is bound, except in any such case to theextent such conflict or breach has been waived herein or by a written waiverdocument, a copy of which has been delivered to Administrative Agent on orbefore the date hereof;

 

(d)                                no Material Adverse Effect has occurred andis continuing; and

 

(e)                                 no Default or Event of Default hasoccurred and is continuing.

 

Section 6.                                           Ratification.

 

(a)                                 This Amendment shall be deemed to be anamendment to the Credit Agreement, and the Credit Agreement, as hereby amended,and all Obligations in connection therewith, are hereby ratified, approved andconfirmed in each and every respect.  Onand after the effectiveness of this Amendment in accordance with Section 4above, each reference in the Credit Agreement to “thisAgreement”, “hereunder”, “hereof” or words of like import, referring tothe Credit Agreement, and each reference in each other Loan Document to “the Credit Agreement”, “thereunder”, “thereof”or words of like import referring to the Credit Agreement, shall mean and be areference to the Credit Agreement as amended or otherwise modified by thisAmendment.  This Amendment is a LoanDocument.

 

(b)                                The Borrower and each of its Subsidiarieshereby ratifies, approves and confirms in every respect all the terms,provisions, conditions and obligations of each of the Security Documents,including without limitation all Mortgages, Pledge and Security Agreements, andGuaranties, to which it is a party.

 

Section 7.                                           Costs and Expenses. As provided in Section 9.4 of the Credit Agreement, the Borroweragrees to reimburse Administrative Agent for all fees, costs, and expenses,including the reasonable fees, costs, and expenses of counsel or other advisorsfor advice, assistance, or other representation in connection with thisAmendment.

 

Section 8.                                           **GOVERNING LAW****. THIS AGREEMENT HASBEEN NEGOTIATED, IS BEING EXECUTED AND DELIVERED, AND WILL BE PERFORMED INWHOLE OR IN PART, IN THE STATE OF NEW YORK, AND THE**

 

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**SUBSTANTIVELAWS OF SUCH STATE AND THE APPLICABLE FEDERAL LAWS OF THE UNITED STATES OFAMERICA SHALL GOVERN THE VALIDITY, CONSTRUCTION, ENFORCEMENT AND INTERPRETATIONOF THE LOAN DOCUMENTS, EXCEPT TO THE EXTENT THE LAWS OF ANY JURISDICTION WHERECOLLATERAL IS LOCATED REQUIRE APPLICATION OF SUCH LAWS WITH RESPECT TO SUCHCOLLATERAL.**

 

Section 9.                                           Severability. Any provision of this Amendment that is prohibited or unenforceable inany jurisdiction shall, as to such provision and such jurisdiction, beineffective to the extent of such prohibition or unenforceability withoutinvalidating the remaining provisions of this Amendment or affecting thevalidity or enforceability of such provision in any other jurisdiction.

 

Section 10.                                     Counterparts. This Amendment may be executed in any number of counterparts, all ofwhich taken together shall constitute one and the same instrument, and anyparty hereto may execute this Amendment by signing one or morecounterparts.  Any signature heretodelivered by a party by facsimile transmission shall be deemed to be anoriginal signature hereto.

 

Section 11.                                     No Waiver.  Except asexpressly set forth in this Amendment, the execution, delivery andeffectiveness of this Amendment shall not operate as a waiver of any default ofthe Borrower or any other Obligor or any right, power or remedy of theAdministrative Agent or the other Secured Parties under any of the LoanDocuments, nor constitute a waiver of any provision of any of the LoanDocuments.

 

Section 12.                                     Successorsand Assigns.  This Amendment shall be binding upon theBorrower and its successors and permitted assigns and shall inure, togetherwith all rights and remedies of each Lender hereunder, to the benefit of eachLender and the respective successors, transferees and assigns.

 

Section 13.                                     **Entire Agreement****. THIS AMENDMENT, THE CREDIT AGREEMENT AND THE OTHER LOAN DOCUMENTSCONSTITUTE THE ENTIRE AGREEMENT BETWEEN THE PARTIES HERETO WITH RESPECT TO THESUBJECT HEREOF AND SHALL SUPERSEDE ANY PRIOR AGREEMENT BETWEEN THE PARTIESHERETO, WHETHER WRITTEN OR ORAL, RELATING TO THE SUBJECT HEREOF.  FURTHERMORE, IN THIS REGARD, THIS AGREEMENT REPRESENTSTHE FINAL AGREEMENT AMONG THE PARTIES THERETO AND MAY NOT BE CONTRADICTEDBY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF SUCHPARTIES.**

 

**THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG SUCHPARTIES.**

 

[Signature Pages Follow]

 

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IN WITNESSWHEREOF, the parties hereto have caused this Amendment to be duly executed anddelivered by their respective duly authorized officers as of the date hereof.

 
|   | BORROWER:                    |
|--------|------------------------------|
|   |                         |
|   | PINNACLE GAS RESOURCES, INC. |
|   |                         |
|   |                         |
|   | By:                          |     /s/  Peter G. Schoonmaker |
|   | Name:                        | Peter G. Schoonmaker |
|   | Title:                       | Chief Executive Officer and President |
|        |                              |  |  |

 

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|   | ADMINISTRATIVE AGENT:           |
|--------|---------------------------------|
|   |                            |
|   | THE ROYAL BANK OF SCOTLAND plc, |
|   |                            |
|   |                            |
|   | By:                             |     /s/  Robert L. Roberts |
|   | Name:                           | Robert L. Roberts |
|   | Title:                          | Managing Director |
|        |                                 |  |  |

 

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|   | LENDER:                         |
|--------|---------------------------------|
|   |                            |
|   | THE ROYAL BANK OF SCOTLAND plc, |
|   |                            |
|   |                            |
|   | By:                             |     /s/  Robert L. Roberts |
|   | Name:                           | Robert L. Roberts |
|   | Title:                          | Managing Director |
|        |                                 |  |  |

 

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