This summary highlights selected information contained in this joint proxy statement/prospectus and does not contain all the information that is important to you. We encourage you to read carefully this joint proxy statement/prospectus in its entirety, including the full text of the attached annexes. We have included page references parenthetically to direct you to a more complete description of the topics presented in this summary. We have defined certain oil and gas industry terms used in this joint proxy statement/prospectus in Annex J.

 

PostRock Energy Corporation

210 Park Avenue

Suite 2750

Oklahoma City, Oklahoma 73102

(405) 600-7704

 

PostRock Energy Corporation is a Delaware corporation formed on July 1, 2009 under the name New Quest Holdings Corp. solely for the purpose of effecting the recombination. On October 2, 2009, the corporation changed its name to PostRock Energy Corporation. PostRock has not conducted any business operations other than incidental to its formation and in connection with the transactions contemplated by the merger agreement. Following the recombination, PostRock will own QRCP, QELP and QMLP as direct or indirect wholly-owned subsidiaries and will have no significant assets other than the stock or other voting securities of its subsidiaries. For additional information about PostRock following the recombination, please see “PostRock Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business of PostRock.”

 

Quest Resource Corporation

210 Park Avenue

Suite 2750

Oklahoma City, Oklahoma 73102

(405) 600-7704

 

Quest Resource Corporation (NASDAQ: QRCP) is a Nevada corporation that is an integrated independent energy company involved in the acquisition, development, gathering, transportation, exploration, and production of oil and natural gas. QRCP’s principal operations and producing properties are located in the Cherokee Basin of southeastern Kansas and northeastern Oklahoma and the Appalachian Basin in West Virginia, Pennsylvania and New York. QRCP conducts substantially all of its production operations through QELP and its natural gas transportation and gathering operations through QMLP. QRCP’s Cherokee Basin operations are currently focused on developing coal bed methane, or CBM, gas production through QELP, which is served by a gas gathering pipeline network owned by QMLP. QRCP’s Appalachian Basin operations are primarily focused on the development of the Marcellus Shale through Quest Eastern Resource LLC, a wholly-owned subsidiary of QRCP (“Quest Eastern”), and QELP. As of September 30, 2009, excluding assets held by QELP and QMLP, QRCP’s assets consisted of approximately 44,779 net acres, five gross wells in various stages of completion, one producing gross well and approximately 183 miles of gas gathering pipeline in the Appalachian Basin owned by Quest Eastern. As of December 31, 2008, excluding reserves held by QELP, QRCP had a total of approximately 7.7 Bcfe of estimated net proved reserves with estimated future net cash flows discounted at 10% of $8.0 million. As of such date, excluding reserves held by QELP, approximately 22.1% of QRCP’s estimated net proved reserves were proved developed and 99.0% were natural gas. Additionally, QRCP holds an approximate 55.5% limited partner interest in QELP, all of the membership interests in QEGP, an approximate 35.4% limited partner interest in QMLP, and 85% of the membership interests in QMGP.

 

Quest Energy Partners, L.P.

210 Park Avenue

Suite 2750

Oklahoma City, Oklahoma 73102

(405) 600-7704

 

Quest Energy Partners, L.P. (NASDAQ: QELP) is a Delaware limited partnership that was formed in July 2007 by QRCP to acquire, exploit, and develop oil and natural gas properties and to acquire, own, and operate related assets. QELP’s principal operations and producing properties are located in the Cherokee Basin of southeastern Kansas and northeastern Oklahoma and the Appalachian Basin in West Virginia and New York. QELP’s Cherokee Basin operations are currently focused on developing CBM gas production. QELP’s Appalachian Basin operations are primarily focused on the development of the Marcellus Shale. As of September 30, 2009, QELP’s assets consisted of approximately 537,298 net acres and over 3,000 wells capable of production. As of December 31, 2008, QELP had a total of approximately 167.1 Bcfe of estimated net proved reserves with estimated future net cash flows discounted at 10% of $156.1 million. As of such date, approximately 83.2% of the estimated net proved reserves were proved developed and 97.6% were natural gas. Net production from properties held by QELP for the nine months ended September 30, 2009 was approximately 16.5 Bcfe.

 

Quest Midstream Partners, L.P.

210 Park Avenue

Suite 2750

Oklahoma City, Oklahoma 73102

(405) 600-7704

 

Quest Midstream Partners, L.P. is a Delaware limited partnership formed in December 2006 by QRCP to own, operate and acquire midstream energy assets. At its formation, QMLP acquired from QRCP its natural gas gathering pipelines and related facilities that serve the Cherokee Basin of southeastern Kansas and northeastern Oklahoma, which we refer to as either the Bluestem gas gathering system or the Bluestem System. QMLP provides natural gas gathering, compression and treating services to QELP, which currently provides over 90% of the natural gas that QMLP gathers on the Bluestem gas gathering system, and to other producers in the Cherokee Basin. The Bluestem gas gathering system consists of approximately 2,173 miles of pipeline with a maximum daily throughput of approximately 85 Mmcf/d. Currently, it is operating at about 80% capacity. QMLP also owns and operates an interstate pipeline referred to as the KPC Pipeline, which transports natural gas from northern Oklahoma and western Kansas to the metropolitan Wichita, Kansas and Kansas City, Missouri markets. The KPC Pipeline consists of approximately 1,120 miles of natural gas pipeline, three compressor stations with a total of 14,680 horsepower and a throughput capacity of approximately 160 Mmcf/d.

 

Quest Energy GP, LLC

210 Park Avenue

Suite 2750

Oklahoma City, Oklahoma 73102

(405) 600-7704

 

Quest Energy GP, LLC (“QEGP”) is a Delaware limited liability company and a wholly-owned subsidiary of QRCP. As the general partner of QELP, QEGP conducts the business of and manages the operations of QELP, and QEGP’s board of directors and officers make decisions on QELP’s behalf. QEGP owns a 2% general partner interest and all of the incentive distribution rights of QELP.

 

Quest Midstream GP, LLC

210 Park Avenue

Suite 2750

Oklahoma City, Oklahoma 73102

(405) 600-7704

 

Quest Midstream GP, LLC (“QMGP”) is a Delaware limited liability company and the general partner of QMLP. QRCP owns 85% of the membership interests of QMGP, and certain investors who also are common unitholders of QMLP own the remaining 15% of the membership interests. QMGP conducts the business of and manages the operations of QMLP, and QMGP’s board of directors and officers make decisions on QMLP’s behalf. QMGP owns a 2% general partner interest and all of the incentive distribution rights of QMLP.

 

The QRCP Annual Meeting of Stockholders

 

Time, Date and Place

 

The QRCP annual meeting of stockholders will be held on March 5, 2010 at 8:00 a.m. local time, at the Ronald J. Norick Downtown Library, 300 Park Avenue, 4th Floor, Oklahoma City, Oklahoma 73102.

 

Purpose

 

QRCP’s stockholders are being asked to consider and vote on a proposal to approve the merger agreement and the QRCP merger, a proposal to approve the PostRock 2010 long-term incentive plan, the re-election of the four directors currently serving on QRCP’s board and any proposals that may be presented to adjourn the annual meeting.

 

Stockholders Entitled to Vote

 

QRCP stockholders of record as of the close of business on February 1, 2010 are entitled to notice of and to vote at the annual meeting. Each share of QRCP common stock held by such record stockholders will be entitled to one vote at the annual meeting. Shares held by QRCP as treasury shares are not entitled to vote.

 

Vote Necessary

 

Proposal 1 — Approval of the merger agreement and the QRCP merger requires the affirmative vote of the holders of a majority of the shares of QRCP common stock outstanding and entitled to vote as of the record date.

 

Proposal 2 — Approval of the PostRock 2010 long-term incentive plan requires the affirmative vote of the holders of (1) a majority of the shares of QRCP common stock cast on the proposal and (2) a majority of the shares of QRCP common stock and QELP common units (other than units held by QRCP) in the aggregate, in each case on a PostRock equivalent share basis, cast on the proposal. Approval of Proposal 1 is a condition precedent to implementation of Proposal 2.

 

Proposal 3 — The directors nominated to serve as members of QRCP’s board will be re-elected by a plurality of the votes cast. Accordingly, the four nominees who receive the highest number of affirmative votes will be elected.

 

Proposal 4 — Passage of any proposal that may be presented to adjourn the annual meeting to a later date to solicit additional proxies in the event that there are insufficient votes in favor of any of the foregoing proposals requires the affirmative vote of the holders of a majority of the shares of QRCP common stock cast on the proposal.

 

Shares Beneficially Owned by Directors and Officers

 

The directors and officers of QRCP held 353,121 shares of QRCP common stock entitled to vote as of February 1, 2010. These shares represent approximately 1% of the total voting power of QRCP’s voting securities. QRCP’s directors and officers have indicated that they intend to vote all of the shares of QRCP common stock held by them in favor of the proposal to approve the merger agreement and the QRCP merger, the proposal to approve the PostRock 2010 long-term incentive plan, the re-election of the four director nominees and any proposal that may be presented to adjourn the meeting.

The QELP Special Meeting of Common Unitholders

 

Time, Date and Place

 

The QELP special meeting of common unitholders will be held on March 5, 2010 at 9:00 a.m. local time, at the Ronald J. Norick Downtown Library, 300 Park Avenue, 4th Floor, Oklahoma City, Oklahoma 73102.

 

Purpose

 

The common unitholders of QELP are being asked to consider and vote on a proposal to approve and adopt the merger agreement and the QELP merger and a proposal to approve the PostRock 2010 long-term incentive plan.

 

Unitholders Entitled to Vote

 

QELP common unitholders of record as of the close of business on February 1, 2010 are entitled to notice of and to vote at the QELP special meeting. Each QELP common unit is entitled to one vote on the matters submitted to a vote of the holders of such units, except that common units owned by QEGP and its affiliates (including its officers and directors and QRCP) will not be entitled to vote on the proposal to approve and adopt the merger agreement and the QELP merger and common units owned by QRCP will not be entitled to vote on the proposal to approve the PostRock 2010 long-term incentive plan.

 

Vote Necessary

 

Proposal 1 — Approval and adoption of the merger agreement and the QELP merger requires the affirmative vote of the holders of a majority of the QELP common units outstanding as of the record date (other than common units owned by QEGP and its affiliates), voting as a class. Approval and adoption of the merger agreement and the QELP merger also requires the affirmative vote of the holders of a majority of the QELP subordinated units voting as a class. Pursuant to the support agreement, QRCP agreed, subject to the terms of the support agreement, to vote all of the QELP subordinated units held by it in favor of the proposal to approve and adopt the merger agreement and the QELP merger. Since QRCP holds all of the QELP subordinated units, it is intended that this approval will be obtained by written consent rather than at the special meeting.

 

Proposal 2 — Approval of the PostRock 2010 long-term incentive plan requires the affirmative vote of the holders of (1) a majority of the shares of QRCP common stock cast on the proposal and (2) a majority of the QELP common units (other than units held by QRCP) and shares of QRCP common stock in the aggregate, in each case on a PostRock equivalent share basis, cast on the proposal. Approval of Proposal 1 is a condition precedent to implementation of Proposal 2.

 

The special meeting of QELP common unitholders may be adjourned by QEGP or the chairperson of the meeting designated by QEGP to a later date to solicit additional proxies in the event there are insufficient votes in favor of either of the foregoing proposals.

 

Common Units Beneficially Owned by Directors and Officers

 

The directors and officers of QEGP held 57,044 QELP common units entitled to vote as of February 1, 2010. These common units represent less than 1% of the total voting power of QELP’s common units. In addition, QRCP owns 3,201,521 common units and all the outstanding subordinated units. The common units held by QEGP and its affiliates (including its officers and directors and QRCP) will not be entitled to vote on the proposal to approve and adopt the merger agreement and the QELP merger, and common units held by QRCP will not be entitled to vote on the proposal to approve the PostRock 2010 long-term incentive plan. QEGP’s directors and officers have, however, indicated that they intend to vote all of the QELP common units held by them in favor of the proposal to approve the PostRock 2010 long-term incentive plan.

 

Pursuant to the merger agreement, (a) Quest Resource Acquisition Corp. (“QRCP MergerSub”), a direct wholly-owned subsidiary of PostRock, will merge with and into QRCP with QRCP surviving, (b) Quest Energy Acquisition,

LLC (“QELP MergerSub”), a direct wholly-owned subsidiary of QRCP, will merge with and into QELP with QELP surviving and (c) QMLP will merge with and into Quest Midstream Acquisition, LLC (“QMLP MergerSub”), a direct wholly-owned subsidiary of QRCP, with QMLP MergerSub surviving. As consideration, each holder of QRCP common stock will receive 0.0575 shares of PostRock common stock for each share of QRCP common stock; each holder of QELP common units (other than QRCP) will receive 0.2859 shares of PostRock common stock for each common unit of QELP; and each holder of QMLP common units will receive 0.4033 shares of PostRock common stock for each common unit of QMLP. Subordinated units and incentive distribution rights in each of QELP and QMLP have been assigned no value and will be cancelled for no consideration in connection with the recombination. In addition, the general partner interests in QELP will remain outstanding (but will be cancelled for no consideration in a subsequent step in the recombination) and the general partner interests in QMLP will be converted into shares of PostRock common stock equal to approximately 0.14% of the PostRock common stock to be issued in the recombination. Such shares are to be transferred to the QMLP common unitholders who also are the holders of the 15% interest in QMGP not held by QRCP.

 

As a result of the recombination, (i) former QRCP stockholders will own approximately 23% of the common stock of PostRock, former QELP common unitholders (other than QRCP) will own approximately 33% of the common stock of PostRock, and former QMLP common unitholders will own approximately 44% of the common stock of PostRock, (ii) PostRock will own 100% of QRCP, and (iii) QRCP will own 100% of the successors to QELP and QMLP. The exchange ratios are fixed and will not be adjusted to reflect stock or unit price changes or other changes in the relative values of the companies prior to the closing of the recombination. All unvested restricted shares and units and bonus shares and units of any of the three entities outstanding as of the date of the merger agreement will become fully vested at the closing and be converted into PostRock common stock, and all other equity-based awards will convert into equivalent awards of PostRock, in each case based on the exchange ratios.

 

 

The boards of QRCP and QEGP, the QRCP special committee and the QEGP conflicts committee believe the recombination is critical to the future success of the entities. QRCP, QELP and QMLP are all in difficult economic circumstances. The boards and committees of QRCP and QEGP believe that their ability to avoid filing for bankruptcy will be substantially enhanced if the recombination is completed. They also believe that, under the current difficult economic environment and given the issues facing QRCP, QELP and QMLP, the costs and burdens of maintaining the current structure of three separate companies significantly outweigh the benefits. Recombining the three companies will eliminate many of these costs and burdens and will allow management and the board of the combined entity to substantially increase their focus on stabilizing and working to grow the companies’ respective businesses, thereby providing considerable upside potential to QRCP stockholders and QELP unitholders as stockholders of the combined company.

 

To review the background of the recombination and additional reasons for the recombination, please see “The Recombination — Background of the Recombination,” “— QRCP’s Reasons for the Recombination and Recommendations of QRCP’s Special Committee and QRCP’s Board of Directors,” “— QEGP’s Reasons for the Recombination and Recommendations of QEGP’s Conflicts Committee and QEGP’s Board of Directors” and “— QMGP’s Reasons for the Recombination.”

 

Before the Recombination*

 

 

 

After the Recombination

 

 

 

 

The QRCP board of directors, acting on the unanimous recommendation of the QRCP special committee, has unanimously determined that the merger agreement and the QRCP merger are advisable, fair to and in the best interests of QRCP and the holders of QRCP common stock and approved and adopted the merger agreement and the QRCP merger. The QRCP board of directors, acting on the unanimous recommendation of the special committee, unanimously recommends that the QRCP stockholders vote FOR the approval of the merger agreement and the QRCP merger.

 

The conflicts committee of the board of directors of QEGP and the QEGP board of directors, acting on the unanimous recommendation of the conflicts committee, have unanimously determined that the merger agreement and the QELP merger are advisable, fair to and in the best interests of QELP and the holders of QELP common units (other than QEGP and its affiliates) and approved the merger agreement and the QELP merger. The QEGP board of directors and the conflicts committee unanimously recommend that the holders of QELP common units (other than QEGP and its affiliates) vote FOR the approval and adoption of the merger agreement and the QELP merger.

 

QRCP retained Mitchell Energy Advisors, LLC (“Mitchell Energy”) to act as its financial advisor in connection with the recombination, because the fee charged by Mitchell Energy to deliver a fairness opinion was significantly less than the fee that was being requested by QRCP’s then financial advisor and QRCP believed Mitchell Energy was qualified to provide those services. At a meeting of the QRCP special committee held on July 2, 2009, Mitchell Energy rendered its opinion to the QRCP directors that, as of July 2, 2009, and subject to the assumptions, qualifications and limitations relating to such opinion, the consideration to be received by the holders of QRCP common stock in the QRCP merger was fair, from a financial point of view, to such holders of QRCP common stock.

 

The description of the Mitchell Energy opinion set forth in this joint proxy statement/prospectus is a summary of all material provisions of the opinion. For the full text of the Mitchell Energy opinion, dated as of July 2, 2009, which sets forth, among other things, the assumptions made, procedures followed, matters considered, and qualifications and limitations of the review undertaken by Mitchell Energy in rendering its opinion, please see Annex D to this joint proxy statement/prospectus. The holders of QRCP common stock are urged to read the Mitchell Energy opinion carefully and in its entirety. Mitchell Energy provided its opinion solely for the information and assistance of the QRCP board of directors and it may not be used for any other purpose. Mitchell Energy’s opinion is not to be relied upon by any stockholders of QRCP, or any QMLP or QELP common unitholders, or any other person or entity and is not a recommendation as to how any such individual or entity should vote with respect to the merger agreement and the applicable merger.

 

The conflicts committee of the board of directors of QEGP retained Stifel, Nicolaus & Company, Incorporated to act as its financial advisor in connection with the recombination. At a meeting of the conflicts committee on July 2, 2009, Stifel Nicolaus rendered its opinion to the conflicts committee that, as of July 2, 2009, based upon and subject to the factors and assumptions set forth in the opinion, the exchange ratio to be utilized in the QELP merger was fair, from a financial point of view, to the holders of QELP common units (other than QELP common units to be cancelled pursuant to the merger agreement and common units issuable under QELP restricted awards).

 

The description of the Stifel Nicolaus opinion set forth in this joint proxy statement/prospectus is a summary of all material provisions of the opinion. For the full text of the opinion of Stifel Nicolaus, dated July 2, 2009, which sets forth assumptions made, procedures followed, matters considered and limitations on the review undertaken in connection with the opinion, please see Annex E to this joint proxy statement/prospectus. QELP common unitholders are urged to read the opinion carefully and in its entirety. Stifel Nicolaus provided its opinion for the information and assistance of the conflicts committee in connection with the committee’s consideration of the

QELP merger. Stifel Nicolaus’ opinion is not a recommendation as to how any QELP common unitholder should vote with respect to the merger agreement and the QELP merger.

 

The conflicts committee of the board of directors of QMGP and the QMGP board of directors, acting on the unanimous recommendation of the conflicts committee, have unanimously determined that the merger agreement and the QMLP merger are advisable, fair to and in the best interests of QMLP and the holders of QMLP common units (other than QMGP and its affiliates) and approved the merger agreement and the QMLP merger. The QMGP board of directors and the conflicts committee have unanimously recommended that the holders of QMLP common units (other than QMGP and its affiliates) vote FOR the approval and adoption of the merger agreement and the QMLP merger.

 

You should consider carefully all of the risk factors together with all of the other information included in this joint proxy statement/prospectus before deciding how to vote. The risks related to the recombination, the financial condition of QRCP, QELP and QMLP, the business of PostRock and ownership of PostRock common stock are described under the caption “Risk Factors” beginning on page 27 of this joint proxy statement/prospectus.

 

You should be aware that the QRCP, QEGP and QMGP directors and executive officers have interests in the recombination as directors or executive officers that are different from, or in addition to, the interests of other QRCP stockholders, QELP unitholders and QMLP unitholders generally, including:

 

 

In addition, some of the officers and directors of QRCP are also directors and officers of QEGP and QMGP. QRCP stockholders and QELP and QMLP unitholders should consider these interests in conjunction with the recommendation of the boards of directors of QRCP, QEGP and QMGP and applicable committees to approve the merger agreement and the applicable merger.

 

The PostRock board of directors upon consummation of the recombination will consist of nine members, two of whom will be designated by QRCP’s board of directors (William H. Damon III and Jon H. Rateau), three of whom will be designated by QEGP’s board of directors (Gary Pittman, Mark A. Stansberry and J. Philip McCormick), three of whom will be designated by QMGP’s board of directors (Daniel Spears, Duke R. Ligon and Gabriel Hammond) and one of whom will be the principal executive officer of PostRock (David C. Lawler). Gary Pittman, the current chairman of QEGP’s board of directors, will be the chairman of the PostRock board of

directors unless Mr. Pittman is not able or willing to serve as a director at the time of the consummation of the recombination, in which case the PostRock board will elect a chairman.

 

If any of the designees to the PostRock board of directors identified above is not able or willing to serve as a director at the time of the consummation of the recombination, the party that designated such designee will determine a replacement and, if Mr. Lawler is not the principal executive officer of PostRock at the time of the consummation of the recombination, the person designated to be such principal executive officer will be a member of the board of directors. After the consummation of the recombination, each director of PostRock will serve as a director until such person’s successor is elected or, if earlier, until such director dies, resigns or is removed in accordance with PostRock’s organizational documents and applicable law.

 

The designees to the PostRock board of directors identified above have indicated that they intend to vote all equity interests of QRCP, QEGP, QELP, QMGP and QMLP, as applicable, held by them or over which they have control in favor of approval and adoption of the merger agreement and the mergers contemplated by the merger agreement.

 

A composite copy of the merger agreement, as amended, is attached as Annex A to this joint proxy statement/prospectus and governs the terms of the recombination.

 

Conditions to the Mergers (Page 129)

 

QRCP’s, QELP’s and QMLP’s obligations to consummate the recombination are subject to the satisfaction or waiver of a number of conditions, including:

 

 

 

On December 17, 2009, each of QRCP, QELP and QMLP acknowledged that the condition to the recombination regarding the arrangement of one or more credit facilities for PostRock and its subsidiaries on terms reasonably acceptable to the board of directors of QRCP and the conflicts committee of each of QEGP and QMGP has been satisfied. Such acknowledgement is conditioned upon the credit agreements of each of QRCP, QELP and QMLP, as amended, being in effect at the closing on the same terms as existed on December 17, 2009.

 

No Solicitation (Page 126)

 

The merger agreement contains “no solicitation” provisions that prohibit the parties from taking actions to solicit an alternative proposal. The agreement does not, however, prohibit the parties from furnishing information to or participating in negotiations with a person making an unsolicited alternative proposal that such party’s board of directors determines is or could reasonably be expected to result in a superior proposal, if the failure to do so could reasonably be expected to be necessary to comply with that board’s fiduciary duties under applicable laws.

 

Termination of the Merger Agreement (Page 131)

 

The board of directors of QRCP, QEGP or QMGP may terminate the merger agreement at any time prior to the recombination by mutual written consent or if:

 

 

Expenses and Termination Fees (Page 131)

 

Whether or not the recombination is consummated, the costs and expenses incurred in connection with the merger agreement and the transactions contemplated by the merger agreement will be paid on the basis of 10% by QRCP, 45% by QELP and 45% by QMLP, except that all costs and expenses of mailing this joint proxy statement/prospectus to, and soliciting proxies (including fees of proxy solicitors) from, the QRCP stockholders and the QELP common unitholders will be paid 50% by QRCP and 50% by QELP, and all costs and expenses of mailing this joint proxy statement/prospectus to, and soliciting proxies, if any, from, the QMLP unitholders will be paid by QMLP. If the merger agreement is terminated based on a party’s breach of, or failure to perform, any covenant or agreement, the breaching party will reimburse the other parties for their expenses up to $750,000 in the aggregate for each other party.

In addition, each party has agreed to pay each of the other parties a termination fee of $250,000 (for an aggregate of $500,000) if the merger agreement is terminated in the circumstances described under “The Merger Agreement — Expenses and Termination Fees.”

 

The QRCP merger has been structured so that a holder of QRCP common stock will not recognize gain or loss upon the receipt of PostRock common stock in exchange for QRCP common stock in the recombination. It is a condition to the closing of the QRCP merger that Stinson Morrison Hecker LLP deliver its opinion to QRCP and PostRock that for U.S. federal income tax purposes no gain or loss will be recognized by a holder of QRCP common stock upon the transfer of QRCP common stock to PostRock in exchange for PostRock common stock pursuant to the QRCP merger.

 

The QELP merger and the QMLP merger have both been structured as taxable exchanges, with the result that holders of QELP common units and holders of QMLP common units will realize gain or loss. It is expected by QELP and PostRock that most holders of QELP common units will recognize predominantly capital losses. These capital losses may be used immediately to offset capital gains and, in the case of individuals, up to $3,000 of ordinary income. It is expected by QMLP and PostRock that most holders of QMLP common units will realize predominantly ordinary losses. In the case of QMLP common unitholders that are subject to the passive loss rules, it is unclear whether these ordinary losses may be deducted immediately or, alternatively, will be deductible only against future passive income realized by the holder from other sources or upon a fully taxable disposition of the PostRock common stock received in the QMLP merger.

 

This summary does not address tax consequences that may vary with, or depend upon, individual circumstances. Accordingly, you should consult a tax advisor to determine the U.S. federal, state, local and foreign tax consequences to you of the recombination taking into account your particular circumstances.

 

Prior to the recombination, QELP and QMLP are controlled by QRCP and included in the consolidated financial statements of QRCP. The recombination will be accounted for as an equity transaction among the owners of the consolidated entity using historical cost accounting with no gain or loss being recognized.

 

The recombination currently does not meet the thresholds for furnishing premerger notification and other information to the Antitrust Division of the U.S. Department of Justice and the U.S. Federal Trade Commission under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, and the parties are not aware of any other material regulatory filings or approvals that are required in connection with the recombination.

 

QRCP stockholders do not have appraisal or dissenters’ rights under the QRCP articles of incorporation or Nevada law in connection with the QRCP merger. In addition, under Delaware law and their respective partnership agreements, QELP and QMLP unitholders do not have appraisal or dissenters’ rights.

 

The following table sets forth, for the periods indicated, the high and low sales prices per share of QRCP common stock and per unit of QELP common units on the Nasdaq Global Market. For current price information, you should consult publicly available sources. QMLP is a privately held limited partnership and there is no public trading market for QMLP common units. The table also sets forth distribution information for QELP and QMLP. QRCP has not paid any dividends during the periods presented.

 

 

 

 

 

The following table sets forth the closing sales prices per share of QRCP common stock, on an actual and equivalent share basis, and QELP common units, on an actual and equivalent share basis, on the Nasdaq Global Market on the following dates:

 

 

 

 

Based on the exchange ratios to be used in the mergers, if the recombination is consummated, a stockholder of QRCP will receive one share of PostRock common stock for each 17.4 shares of QRCP common stock held by such stockholder and a common unitholder of QELP (other than QRCP) will receive one share of PostRock common stock for each 3.5 common units of QELP held by such unitholder. As of February 1, 2010, there were 32,097,812 outstanding shares of QRCP and 9,235,040 outstanding common units of QELP not held by QRCP.

 

QRCP has not declared any cash dividends on its common stock and does not anticipate paying any dividends on its common stock in the foreseeable future.

 

The board of directors of QEGP suspended distributions on QELP subordinated units for the third quarter of 2008 and on all units starting with the distribution for the fourth quarter of 2008 in order to conserve cash to properly conduct operations, maintain strategic options and plan for future required principal payments under its debt instruments. QMLP has only paid one partial distribution on its subordinated units in 2007 and did not pay any distributions on any of its units for the third or fourth quarters of 2008 or for any quarters in 2009. QELP and QMLP are unable to estimate when such distributions may, if ever, be resumed.

 

The board of directors of PostRock will determine the dividend policy of PostRock after the recombination. PostRock does not expect to pay dividends for the foreseeable future.

 

The following table sets forth summary historical consolidated financial data of QRCP and its subsidiaries, including QELP and QMLP. The data as of December 31, 2008, 2007, 2006 and 2005 and for the years ended December 31, 2008, 2007, 2006 and 2005 have been derived from the audited financial statements of QRCP. The data as of December 31, 2004 and May 31, 2004 and for the seven month transition period ended December 31, 2004 and for the fiscal year ended May 31, 2004 are derived from unaudited management accounts for such periods from QRCP’s previously filed audited financial statements, which have been restated. The selected historical financial data as of September 30, 2009 and for the nine-month periods ended September 30, 2009 and 2008 are derived from the unaudited financial statements and accompanying footnotes for such periods. These financial statements include the consolidated results of operations of QELP and QMLP. This information is only a summary and should be read together with (1) the historical audited consolidated financial statements of QRCP, including the related notes, contained in this joint proxy statement/prospectus, (2) “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in QRCP’s Annual Report on Form 10-K/A for the year ended December 31, 2008, which is attached to this joint proxy statement/prospectus as Annex F, (3) the historical unaudited consolidated financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in QRCP’s quarterly report on Form 10-Q/A for the quarter ended September 30, 2009, which is attached to this joint proxy statement/prospectus as Annex G, and (4) the PostRock Energy Corporation Unaudited Pro Forma Condensed Consolidated Financial Statements contained in this joint proxy statement/prospectus. Results for interim periods are not indicative of results for the full year.

 

 

Comparability of information in the above table between years is affected by (1) changes in the annual average prices for oil and gas, (2) increased production from drilling and development activity, (3) significant acquisitions that were made during the fiscal year ended May 31, 2004, (4) the change in the fiscal year end on December 31, 2004, (5) the formation of QMLP in December 2006, (6) the acquisition of the KPC Pipeline on November 1, 2007, (7) QELP’s initial public offering effective November 15, 2007 and (8) the acquisition of PetroEdge Resources (WV) LLC (“PetroEdge”) in July 2008.

 

In connection with the preparation and audit of the consolidated financial statements of PostRock and QRCP for the year ended December 31, 2009, PostRock has determined that it will record in its consolidated financial statements a non-cash impairment charge, expected to be in the range of $140 million to $180 million, on its interstate and gathering pipelines and related contract-based intangible assets in the fourth quarter of 2009. This non-cash impairment charge is due to the loss of Missouri Gas Energy, or MGE, a significant customer of the KPC Pipeline, during the fourth quarter of 2009 and amendments to the credit agreements of QELP in December 2009 resulting in a reduction of expected drilling activity in the Cherokee Basin.

 

The following table sets forth summary historical consolidated financial data of QELP. The data as of December 31, 2008, 2007, 2006 and 2005 and for the year ended December 31, 2008, the periods from November 15, 2007 to December 31, 2007 and January 1, 2007 to November 14, 2007, and the years ended December 31, 2006 and 2005 are derived from QELP’s audited consolidated/carve out financial statements and accompanying footnotes for such periods. The data as of December 31, 2004 and May 31, 2004 and the seven-month transition period ended December 31, 2004 and the fiscal year ended May 31, 2004 are derived from unaudited management accounts for such periods from QELP’s predecessor, not from QELP’s previously filed audited financial statements, which have been restated. The selected historical financial data as of September 30, 2009 and for the nine-month periods ended September 30, 2009 and 2008 are derived from the unaudited financial statements and accompanying footnotes for such periods. QELP’s predecessor’s financial statements represent the carve out financial position, results of operations, cash flows and changes in partners’ capital of the Cherokee Basin operations of QRCP (other than its midstream assets), which QRCP contributed to QELP at the completion of QELP’s initial public offering on November 15, 2007. This information is only a summary and should be read together with (1) the historical consolidated financial statements of QELP, including the related notes, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in QELP’s Annual Report on Form 10-K/A for the year ended December 31, 2008, which is attached to this joint proxy statement/prospectus as Annex H, (2) QELP’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009, which is attached to this joint proxy statement/prospectus as Annex I, and (3) the PostRock Energy Corporation Unaudited Pro Forma Condensed Consolidated Financial Statements contained in this joint proxy statement/prospectus. Results for interim periods are not indicative of results for the full year.