##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM
8-K/A
 CURRENT REPORTPursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
 Date of Report (Date of earliest event reported): October 19, 2007
 COPANO ENERGY, L.L.C.
 (Exact name of registrant as specified in its charter)
 Delaware
(State or Other Jurisdiction of 
Incorporation or Organization)
    
    001-32329
(Commission File Number)
    
    51-0411678
(I.R.S. Employer
Identification No.)
 2727 Allen Parkway 
Houston, Texas
(Address of Principal Executive Offices)
    
    77019
(Zip Code)
 Registrants Telephone Number, including Area Code: (713) 621-9547
 Not Applicable.
 (Former name or former address, if changed since last report)
 
  o
 o
 o
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Item 9.01 Financial Statements and Exhibits
 (a) Financial Statements of Businesses Acquired.
  CANTERA NATURAL GAS, LLC and SUBSIDIARIES
 
 June 30, 2007
    
    
    December 31, 2006AssetsCurrent assets:Cash and cash equivalents
    
    $
    24,142,507
    
    
    $
    14,565,364Accounts receivable:Trade, net of allowance of $35,000
    
    
    8,724,049
    
    
    
    6,101,256Related parties
    
    
    4,974,848
    
    
    
    4,519,129Prepaid expenses and other
    
    
    2,361,650
    
    
    
    891,983Total current assets
    
    
    40,203,054
    
    
    
    26,077,732Property, plant, and equipment, net of accumulated depreciation
of $2,818,404 and $2,527,867 respectively
    
    
    5,697,036
    
    
    
    5,907,541Other assetsEquity method investments
    
    
    43,798,471
    
    
    
    42,715,530Other
    
    
    177,183
    
    
    
    268,678Total assets
    
    $
    89,875,744
    
    
    $
    74,969,481Liabilities and Members EquityCurrent Liabilities:Accounts payable:Trade
    
    $
    7,702,215
    
    
    $
    5,549,392Due to related parties
    
    
    24,094
    
    
    
    471,053Accrued liabilities
    
    
    413,447
    
    
    
    242,923Current portion of long-term debt
    
    
    10,000,000
    
    
    
    Taxes payable
    
    
    3,300,963
    
    
    
    3,172,502Total current liabilities
    
    
    21,440,719
    
    
    
    9,435,870Debt
    
    
    
    
    
    
    10,000,000Total liabilities
    
    
    21,440,719
    
    
    
    19,435,870Commitments and contingencies (note 7)Members equity, 82,975 units authorized, issued and outstanding
at June 30, 2007 and December 31, 2006
    
    
    68,435,025
    
    
    
    55,533,611Total members equity
    
    
    68,435,025
    
    
    
    55,533,611Total liabilities and members equity
    
    $
    89,875,744
    
    
    $
    74,969,481
  1




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##### 



CANTERA NATURAL GAS, LLC and SUBSIDIARIES
 
 For the Six Months Ended June 30,2007
    
    
    2006Revenue:Gathering fees
    
    $
    61,717,156
    
    
    $
    91,884,182Sale of natural gas liquids
    
    
    34,847,729
    
    
    
    11,233,833Transportation revenue
    
    
    6,012,106
    
    
    
    4,517,192Management fees
    
    
    1,083,753
    
    
    
    916,971Total revenue
    
    
    103,660,744
    
    
    
    108,552,178Operating expenses:Direct costs of revenue
    
    
    94,782,669
    
    
    
    106,761,793Operating expenses
    
    
    588,479
    
    
    
    407,876General and administrative expense
    
    
    2,281,090
    
    
    
    1,999,246Depreciation and amortization expense
    
    
    290,537
    
    
    
    354,826Total operating expenses
    
    
    97,942,775
    
    
    
    109,523,741Operating income (loss)
    
    
    5,717,969
    
    
    
    (971,563
    )Other income (expense):Equity in earnings of affiliates
    
    
    9,938,927
    
    
    
    9,638,467Interest income
    
    
    443,705
    
    
    
    144,044Interest expense
    
    
    (662,095
    )
    
    
    (539,796
    )Other income, net
    
    
    194,700
    
    
    
    17,154Total other income
    
    
    9,915,237
    
    
    
    9,259,869Net income before tax
    
    
    15,633,206
    
    
    
    8,288,306Current tax expense
    
    
    381,792
    
    
    
    Net income
    
    $
    15,251,414
    
    
    $
    8,288,306
  2




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##### 



CANTERA NATURAL GAS, LLC and SUBSIDIARIES
 
 MembersMember Units
    
    
    Capital
    
    
    TotalBALANCE, January 1, 2007
    
    
    82,975
    
    
    $
    55,533,611
    
    
    $
    55,533,611Distributions
    
    
    
    
    
    
    (2,350,000
    )
    
    
    (2,350,000
    )Net income
    
    
    
    
    
    
    15,251,414
    
    
    
    15,251,414BALANCE, June 30, 2007
    
    
    82,975
    
    
    $
    68,435,025
    
    
    $
    68,435,025
  3




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##### 



CANTERA NATURAL GAS, LLC and SUBSIDIARIES
 For the Six Months Ended June 30,2007
    
    
    2006Cash flows from operating activities:Net income
    
    $
    15,251,414
    
    
    $
    8,288,306Adjustment to reconcile net income to net cash
provided by operating activities:Depreciation
    
    
    290,537
    
    
    
    354,826Equity in earnings of unconsolidated subsidiaries
    
    
    (9,938,927
    )
    
    
    (9,638,467
    )Amortization of deferred financing costs
    
    
    72,093
    
    
    
    66,640Distributions
from unconsolidated subsidiaries
    
    
    9,010,419
    
    
    
    10,467,964Changes in operating assets and liabilities:Accounts receivable
    
    
    (2,625,881
    )
    
    
    (2,743,456
    )Prepaid expenses and other assets
    
    
    (1,450,265
    )
    
    
    (1,221,707
    )Accounts payable
    
    
    1,856,668
    
    
    
    (2,243,551
    )Accrued liabilities
    
    
    298,985
    
    
    
    129,237Net cash provided by operating activities
    
    
    12,765,043
    
    
    
    3,459,792Cash flows from investing activities:Contributions to unconsolidated subsidiaries
    
    
    (757,868
    )
    
    
    (2,327,100
    )Capital expenditures
    
    
    (80,032
    )
    
    
    (9,559
    )Net cash used in investing activities
    
    
    (837,900
    )
    
    
    (2,336,659
    )Cash flows from financing activities:Capital distributions
    
    
    (2,350,000
    )
    
    
    Net cash used in financing activities
    
    
    (2,350,000
    )
    
    
    Net increase in cash and cash equivalents
    
    
    9,577,143
    
    
    
    1,123,133Cash and
cash equivalents, beginning of period
    
    
    14,565,364
    
    
    
    6,257,031Cash and
cash equivalents, end of period
    
    $
    24,142,507
    
    
    $
    7,380,164Supplemental disclosures of cash flow information:Cash paid
during the period for interest
    
    $
    524,629
    
    
    $
    342,411Cash paid during the period for taxes
    
    $
    381,792
    
    
    $
    
  4




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##### 



CANTERA NATURAL GAS, LLC
AND SUBSIDIARIES
 Notes to Condensed, Consolidated Financial Statements
(Unaudited)
 (1)
    
    Organization and BusinessCantera Natural Gas, LLC (Cantera LLC or the Company), a Delaware limited liability company,
is a wholly owned subsidiary of Cantera Resources Holdings, LLC (Parent). The Members
liability is limited to the amount of capital contributed.The Company provides natural gas gathering and processing and related services, which include
compression, treatment, transportation and natural gas liquids (NGLs) extraction services for
natural gas producers. Such services are provided primarily to customers in Wyoming and
Louisiana.The accompanying unaudited condensed consolidated financial statements have been prepared by
the Company in accordance with accounting principles generally accepted in the United States
of America for interim financial information and pursuant to the rules and regulations of the
SEC. Certain information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted pursuant to SEC regulations. The unaudited condensed
consolidated financial statements reflect all adjustments and disclosures that are, in the
opinion of management, necessary for a fair presentation. All such adjustments are of a
normal recurring nature. These condensed consolidated financial statements should be read in
conjunction with the audited consolidated financial statements and the notes thereto for the
year ended December 31, 2006. The condensed consolidated statements of operations and cash
flows for the six months ended June 30, 2007 are not necessarily indicative of the results of
operations or cash flows expected for the full year.(2)
    

    Summary of Significant Accounting Policies
 (a)
    
    Consolidated SubsidiariesThe Company consolidates entities in which its ownership is greater than 50%, and/or for
entities for which the Company has control over the operations by means of its ownership
interest or representation on the management committee or board of directors. The
accompanying consolidated financial statements include the accounts of its wholly owned
subsidiaries Cantera Field Services, LLC and Cantera Gas Holdings, LLC.(b)
    
    Unconsolidated SubsidiariesThe Company uses the equity method of accounting for entities where its ownership is
between 20% and 50% and/or for entities where the Company does not control the investee
company by means of its ownership interest or representation on the investees
management committee or board of directors.The Company holds non-controlling interests in two gas-gathering entities, Bighorn Gas
Gathering, LLC (Bighorn), 51% and Fort Union Gas Gathering, LLC (Ft. Union) 37.04%. The
Company has a 50% representation on the management committee of Bighorn, and does
 5




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##### 



not control Bighorn. The Companys representation in Ft. Union is equal to its member
interest, and the Company does not control Ft. Union. Accordingly, both of these
entities are accounted for under the equity method on the accompanying financial
statements (see note 3).
 (c)
    
    Use of EstimatesThe preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
 (d)
    
    Gas Gathering and Processing and Natural Gas Liquids OperationsThe Companys revenue is derived from the sale of residue gas, NGLs and fees collected
for gathering and transporting natural gas. Revenue is recognized once the Company can
conclude it has evidence of an arrangement, the sales or fees are fixed or determinable,
collectibility is probable and delivery has occurred. The Company records revenue on
its gas sales on a gross basis as it obtains tile and takes physical delivery of gas
purchased, and bears the risk of loss and credit exposure on these transactions. The
Company typically enters into long-term contracts that provide for per-unit gathering
and transportation fees. Fees are determined on a monthly basis based upon actual
delivered volumes. The Company assesses collectibility at the inception of an
arrangement based upon credit ratings and prior collections history. In general, the
Company conducts business with a static customer base with whom the Company has had a
long collection history. As a result, the Company has not experienced significant
credit losses, nor has its revenue recognition been impacted due to assessments of
collectibility. Costs are expensed as incurred.(e)
    
    ImbalancesThe Companys activities periodically result in imbalances whereby the Companys
customers have either over- or under-delivered natural gas to the Companys system.
Cost for pipeline imbalances is determined based on the Companys weighted average cost
of gas, using the first-in, first-out method, during the month in which the imbalance
was created. Net positive imbalances, representing under deliveries to customers, are
recorded as gas imbalance inventory, whereas net negative imbalances, representing over
deliveries to customers, are recorded as a liability. The cost of NGL inventory is
determined based on the weighted average cost of gas, including transportation and
carrying charges. At June 30, 2007 and December 31, 2006, the Company had net positive
NGL imbalances of $2,097,728 and $771,761, respectively, which are included in prepaid
expenses and other in the accompanying balance sheet.(f)
    
    Property, Plant and EquipmentProperty, plant and equipment consist of the
following at June 30, 2007 and December 31, 2006:
 6




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##### 



Useful Lives
    
    2007
    
    
    2006Processing and gathering systems
    
    15 - 20 years
    
    $
    7,700,890
    
    
    $
    7,549,920Vehicles, equipment and tools
    
    3 years
    
    
    44,937
    
    
    
    22,475Furniture and computer equipment
    
    3 years
    
    
    769,613
    
    
    
    863,0138,515,440
    
    
    
    8,435,408Less accumulated depreciation
    
    
    
    
    (2,818,404
    )
    
    
    (2,527,867
    )Net property, plant and equipment
    
    
    
    $
    5,697,036
    
    
    $
    5,907,541
 (g)
    
    Concentration of Credit RiskSubstantially all of the Companys accounts receivable at June 30, 2007 and December 31,
2006 result from the sale of natural gas and NGLs to, and gas-gathering fees earned
from, other companies in the oil and gas industry. This concentration of customers may
impact the
Companys overall credit risk, either positively or negatively, in that these entities
may be similarly affected by industry-wide changes in economic or other conditions. Such
receivables are generally not collateralized. However, the Company performs credit
evaluations on all its customers to minimize exposure to credit risk. During 2006,
credit losses were not significant.At June 30, 2007, trade accounts receivable include receivables from three customers
representing 40.0%, 22.8% and 13.0% of total accounts receivable. At December 31, 2006,
trade accounts receivable include receivables from five customers representing 26.4%,
22.6%, 12.6%, 12.5% and 10.7% of total accounts receivable.Revenue for the six months ended June 30, 2007 includes sales to three customers
representing 55.1%, 18.4% and 12.3% of total revenue. Revenue for the six months ended
June 30, 2006 includes sales to one customer representing 77.8% of total revenue. All
remaining customers individually account for less than 10% each of total revenue.(h)
    
    Income TaxesOn January 2, 2004, the Company changed its tax status from a C Corporation (taxable
entity) to a limited liability company (nontaxable entity). With the conversion to a
limited liability company on January 2, 2004, the Company is no longer subject to income
tax. Instead, the tax effects from the Companys operations pass through to the
Companys Parent.The Company adopted Financial Accounting Standards Board Interpretation Number 48,
Accounting for Uncertainty in Income Taxes(FIN 48), effective January 1, 2007. The
interpretation clarifies the accounting for uncertainty in income taxes recognized in a
companys financial statements in accordance with Statement of Financial Accounting
Standards Number 109, Accounting for Income Taxes. Specifically, the pronouncement
prescribes a more likely than not recognition threshold and a measurement attribute
for the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. The interpretation also provides guidance on the
related de-recognition, classification, interest and penalties, accounting for interim
periods, disclosure and transition
 7




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##### 



of uncertain tax positions. The adoption of FIN 48
did not have a material effect on the Companys financial position or results of
operations.
 (i)
    
    Comprehensive IncomeComprehensive income includes all changes in equity during a period from non-owner
sources. For the six months ended June 30, 2007 and 2006, the Company had no
transactions that were required to be reported as adjustments to net income to determine
comprehensive income.
 (3)
    
    Equity Method InvestmentsThe Company accounts for its investments in Bighorn and Ft. Union using the equity method of
accounting. The Company owns non-controlling interests of 51% and 37.04%, respectively, in
Bighorn and Ft. Union, with the ability to exercise significant influence. Under the equity
method, the Company adjusts the carrying amount of its investment for its share of the
earnings or losses and reports the earnings or losses in its statement of operations.
Distributions received reduce the carrying amounts of the investments. The Company is also
responsible for funding project
expenditures for Bighorn either in part, if the other Bighorn partner approves the project, or
in total if the other Bighorn partner does not approve the project but the Company and Bighorn
elected to proceed.Upon the acquisition of these investments, there were differences between the purchase price
allocated to the investments and the underlying equity of the unconsolidated subsidiaries
attributable to the Companys interest. The Company is amortizing these differences based
upon the hypothetical purchase price allocation to the assets and liabilities of the
unconsolidated subsidiaries as if the Company were consolidating these companies. With
respect to the Companys investment in Bighorn, the underlying equity of Bighorn attributable
to the Company was greater than the purchase price allocated to the Companys investment. The
impact of recording this negative goodwill would be to reduce the carrying amount of Bighorns
long-lived assets, and, in turn, reduce the future depreciation expense. With respect to the
Companys investment in Ft. Union, the purchase price allocated to the Companys investment
was greater than the underlying equity, which was a result of estimated fair values of
long-lived assets that exceeded their carrying amounts. The impact of recording the excess
fair value of Ft. Unions long-lived assets would be to increase their carrying amount and,
accordingly, increase future depreciation expense. As a result, the difference between the
carrying amount of the Companys equity method investment and the underlying equity
attributable to the Companys interest is being amortized over the remaining useful lives of
the underlying long-lived assets, which range from 25 to 30 years from the date of
acquisition. Accordingly, significant differences between the carrying amount of the
investments and the underlying equity attributable to the Companys interest exists as of June
30, 2007 and December 31, 2006.The carrying value of the Companys equity method investments consists of the:
 December 31,June 30, 2007
    
    
    2006Bighorn
    
    $
    19,407,381
    
    
    $
    19,627,339Fort Union
    
    
    24,391,090
    
    
    
    23,088,191$
    43,798,471
    
    
    $
    42,715,530
 8




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##### 



Following is combined summary financial information for Bighorn and Ft. Union:
 For the Six Months Ended June 30,2007
    
    
    2006Results of operations:Revenue
    
    $
    30,174,250
    
    
    $
    27,326,821Operating income
    
    
    25,170,194
    
    
    
    23,306,252Net income
    
    
    21,053,140
    
    
    
    19,187,508Cash flows:Operating activities
    
    
    64,715,069
    
    
    
    28,881,114Investing activities
    
    
    (40,951,353
    )
    
    
    (3,745,144
    )Financing activities
    
    
    (22,668,470
    )
    
    
    (22,153,779
    )
 June 30, 2007
    
    
    December 31, 2006Balance sheet:Current assets
    
    $
    20,654,021
    
    
    $
    21,141,378Total assets
    
    
    205,503,581
    
    
    
    167,195,588Current liabilities
    
    
    61,348,603
    
    
    
    22,113,093Total liabilities
    
    
    73,134,539
    
    
    
    36,978,648Partners equity
    
    
    132,369,042
    
    
    
    130,216,940
 (4)
    
    DebtAs of June 30, 2007, the Company had a $10,000,000 term loan and $30,000,000 revolving credit
facility with a bank (the Credit Agreement), as amended on April 26, 2006 and on October 5,
2006. The Credit Agreement is secured by the tangible assets of the Company and matures on
March 3, 2008.As of June 30, 2007 and December 31, 2006, $10,000,000 was outstanding under the Credit
Agreement at weighted average interest rates of 8.05% and 7.64%, respectively. The Credit
Agreement contains financial covenants that require the Company to maintain certain fixed
charge coverage, as well as certain debt coverage and working capital ratios. Debt
outstanding at maturity is payable in full.(5)
    
    Income TaxesAs of June 30, 2007 and December 31, 2006, the Company reflected an income taxes payable of
$3,300,963 and $3,172,502, respectively, for contingencies related to the reorganization of
the Company in 2004, including accrued interest payable of $617,454 and $488,993,
respectively. During the six months ended June 30, 2007, the Company paid $381,792 to settle
other state tax matters related to the reorganization.(6)
    
    Transactions with Affiliated/Related PartiesFor the six months ended June 30, 2007 and 2006, the Company provided services to Canyon Gas
Resources, LLC (Canyon), Bighorn and Ft. Union, all affiliates of the Company, under
management agreements with indefinite terms (the Management Services Agreements). The
Management Services Agreements provide a basic fee payable to the Company commensurate with
 9




---



##### 



services rendered each month. The fees earned for the six months ended June 30, 2007 and 2006
were $1,083,753 and $1,119,855, respectively.As of June 30, 2007 and December 31, 2006, the Company had accounts receivable from related
parties of $4,974,848 and $4,519,129, respectively. The accounts receivable consist of
$4,783,301 and $4,330,670 receivable from Bighorn and Ft. Union for member distributions,
$191,525 and $188,450 receivable from Canyon, Bighorn and Ft. Union related to the Management
Services Agreement and reimbursable expenses, and $22 and $9 receivable from Big Horn and Ft.
Union related to gathering and transportation billing adjustments and imbalance cash-outs,
respectively.The Company has gathering contracts with both Bighorn and Ft. Union, whereby the Company pays
fees to Bighorn and Ft. Union to gather and transport its gas. For the six months ended June
30, 2007 and 2006, total fees paid to Bighorn and Ft. Union were $4,178,751 and $3,140,798,
respectively. As of June 30, 2007 and December 31, 2006, the Company owed $0 and $296,155,
respectively, in connection with these services.The Company is responsible for funding project expenditures for Bighorn either in part, if the
Bighorn partners approve the project, or in total for projects proposed by the Company but for
which the other Bighorn partner does not approve. As of June 30, 2007 and December 31, 2006,
the Company owed $24,094 and $174,898 to Bighorn related to capital projects.(7)
    
    Contingencies and Commitments
 (a)
    
    Contingent PaymentIn 2003, the Company acquired the operating assets of the Company from CMS Gas
Transmission Company (CMS). In addition to cash paid in the acquisition, the Company
issued a Contingent Consideration Note to CMS, dated as of July 2, 2003, that provided
for annual payments to CMS in 2005 through 2009 contingent upon Bighorn and Ft. Union
achieving certain earnings thresholds in 2004 through 2008. If the earnings threshold
is met for a given year, the payment for that year is due in March of the following
year. The Contingent Consideration Note is subordinated to all senior indebtedness of
the Company, and payments shall not exceed $50,000,000 in the aggregate. If the earnings
threshold is not made for a given year, the liability for that year rolls forward one
year and adds to the maximum contingent payment due the following year, and then expires
if not paid by the end of such following year. The earnings thresholds were not met in
2004, 2005 or 2006; therefore, there are no payments due in 2005, 2006 or 2007. Because
the earnings thresholds were not met for 2004, 2005 or 2006, the 2004 and 2005
contingent payments of $7,500,000 and $9,166,667, respectively, expired, and the 2006
contingent payment of $10,833,333 is rolled over to 2007.Pursuant to the terms of the Contingent Consideration Note, at June 30, 2007 annual
contingent payments are limited to the following:
 10




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##### 



Original
    
    
    ContingentContingent
    
    
    NoteYear ended
    
    Payment
    
    
    
    Note
    
    
    MaximumDecember 31,
    
    due March
    
    Status
    
    Payments
    
    
    Payments2004
    
    2005
    
    Expired
    
    $
    7,500,000
    
    
    $
    2005
    
    2006
    
    Expired
    
    
    9,166,667
    
    
    
    2006
    
    2007
    
    Rolled to 2007
    
    
    10,833,333
    
    
    
    2007
    
    2008
    
    
    
    
    10,833,333
    
    
    
    21,666,6662008
    
    2009
    
    
    
    
    11,666,667
    
    
    
    11,666,667$
    50,000,000
    
    
    $
    33,333,333
 Any payments under the Contingent Consideration Note will be recorded, when determined
to be probable, as additional purchase price and allocated to the assets acquired.(b)
    
    Firm Transportation and Gathering AgreementsThe Company is obligated under two firm transportation agreements with a third party,
whereby the Company pays for transportation whether or not the transportation capacity
is used.The first agreement is for 67,200 million British thermal units (mmbtu) per day at the
rate of $0.145 per mmbtu. The agreement was amended and restated as of April 1, 2007
extending the expiration until December 31, 2019, with an initial rate of $0.1434 per
mmbtu decreasing to a rate of $0.115 per mmbtu as of December 1, 2013 and continuing at
that level until December 31, 2019.The second agreement is for 158,900 mmbtu per day at the rate of $0.12 per mmbtu through
November 30, 2009, at which point the daily volume decreases to 95,340 mmbtu per day,
and continues to decline thereafter. This agreement was also amended and restated as of
April 1, 2007, pursuant to which the daily volume will decrease to 22,800 mmbtu per day
and a rate of $0.115 cents per mmbtu in 2015 and continuing at that level until the expiration date
of December 31, 2019.The two firm transportation agreement obligations are offset by Capacity Release
Agreements entered into as of March 1, 2007 with third parties. The Capacity Release
Agreements fully utilize all of the Companys firm transportation capacity through
December 31, 2019.Additionally, the Company is obligated under a firm gathering agreement with a related
party (Ft. Union), whereby the Company pays for gathering capacity whether or not the
capacity is used. The agreement is for 148,150 thousand cubic feet (mcf) per day at the
rate of $0.14 per mcf, or approximately $7.6 million per year, and expires November 30,
2009. Of the 148,150 mcf per day commitment, 63,704 mcf per day has been sub-contracted
to a third party for the duration of the contract, reducing the Companys net commitment
to 84,446 mcf per day, or approximately $4.3 million per year.The Company entered into a second firm gathering agreement with Ft. Union on January 12,
2007 for additional firm gathering capacity under a planned pipeline expansion. This
contract becomes effective with the in-service date of the expansion, estimated to be
October
 11




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##### 



2007. The firm gathering volumes under this agreement start at 50,000 mcf per
day at the rate of $0.14 per mcf. The firm gathering volumes under this agreement
increase to 75,000 mcf per day in 2008, 100,000 mcf per day in 2010, 125,000 mcf per day
in 2011 and 150,000 mcf per day in 2012, at which point the daily volume will remain
constant until termination of the agreement. This agreement expires ten years from the
expansion in-service date.
 (c)
    
    OtherUnder various contracts the Company is committed to gather and process natural gas.
Such contracts are based on market prices and vary in duration from one month to nine
years.From time to time, the Company is involved in legal and administrative proceedings or
claims, which arise in the ordinary course of its business. While such matters always
contain an element of uncertainty, management believes the matters of which they are
aware will not individually or in the aggregate have a material adverse effect on the
Companys financial position or results of operations.
 (8)
    
    Subsequent EventOn August 31, 2007, the Parent entered into a Purchase Agreement for the sale of all of
the Companys membership units to Copano Energy, L.L.C., a third party, for
approximately $675 million, subject to adjustment. Management expects to close the transaction in October
2007.
 12




---



##### 



Report of Independent Registered Public Accounting Firm
 
     /s/ KPMG LLPDenver, ColoradoMarch 26, 2007, except as to note 3,which is as of October 9, 2007
 13




---



##### 



CANTERA NATURAL GAS, LLC
AND SUBSIDIARIES
   2006
    
    
    2005(As restated)
    
    
    (As restated)AssetsCurrent assets:Cash and cash equivalents
    
    $
    14,565,364
    
    
    
    6,257,031Accounts receivable:Trade, net of allowance of $35,000 for each year
    
    
    6,101,256
    
    
    
    5,695,660Related parties
    
    
    4,519,129
    
    
    
    2,290,069Prepaid expenses and other
    
    
    891,983
    
    
    
    122,234Total current assets
    
    
    26,077,732
    
    
    
    14,364,994Property, plant, and equipment, net of accumulated depreciation of
$2,527,867 and $1,856,885, respectively
    
    
    5,907,541
    
    
    
    6,490,226Equity method investments
    
    
    42,715,530
    
    
    
    38,785,380Other long-term assets
    
    
    268,678
    
    
    
    1,249,610Total assets
    
    $
    74,969,481
    
    
    
    60,890,210Liabilities and Members EquityCurrent liabilities:Accounts payable:Trade
    
    $
    5,549,392
    
    
    
    5,941,899Related parties
    
    
    471,053
    
    
    
    2,976,252Accrued liabilities
    
    
    242,923
    
    
    
    359,701Income taxes payable
    
    
    3,172,502
    
    
    
    2,945,205Total current liabilities
    
    
    9,435,870
    
    
    
    12,223,057Debt
    
    
    10,000,000
    
    
    
    10,000,000Total liabilities
    
    
    19,435,870
    
    
    
    22,223,057Commitments and contingencies (note 9)Members equity; authorized, issued, and outstanding 82,975 units
    
    
    55,533,611
    
    
    
    38,667,153Total liabilities and members equity
    
    $
    74,969,481
    
    
    
    60,890,210
  14




---



##### 



CANTERA NATURAL GAS, LLC
AND SUBSIDIARIES
   2006
    
    
    2005
    
    
    2004(As restated)Revenue:Sale of residue gas
    
    $
    171,232,238
    
    
    
    169,144,844
    
    
    
    115,376,157Sale of natural gas liquids
    
    
    41,909,375
    
    
    
    26,559,299
    
    
    
    36,714,222Transportation revenue
    
    
    9,644,797
    
    
    
    7,098,375
    
    
    
    8,392,292Management fees
    
    
    2,194,873
    
    
    
    2,289,364
    
    
    
    841,320Total revenue
    
    
    224,981,283
    
    
    
    205,091,882
    
    
    
    161,323,991Operating expenses:Direct costs of revenue
    
    
    214,170,324
    
    
    
    208,905,885
    
    
    
    160,113,351Operating expenses
    
    
    1,168,390
    
    
    
    805,828
    
    
    
    775,523General and administrative expense, including
equity-based compensation and bonuses of
$0, $12,037,873, and $5,600,000, respectively
    
    
    5,333,023
    
    
    
    15,899,918
    
    
    
    9,583,636Depreciation and amortization expense
    
    
    670,982
    
    
    
    773,461
    
    
    
    784,181Total operating expenses
    
    
    221,342,719
    
    
    
    226,385,092
    
    
    
    171,256,691Operating income (loss)
    
    
    3,638,564
    
    
    
    (21,293,210
    )
    
    
    (9,932,700
    )Other income (expense):Equity in earnings of affiliates
    
    
    20,036,639
    
    
    
    10,768,626
    
    
    
    8,693,406Interest income
    
    
    470,691
    
    
    
    607,882
    
    
    
    315,114Interest expense
    
    
    (1,526,456
    )
    
    
    (2,962,179
    )
    
    
    (2,296,025
    )Other income, net
    
    
    133,505
    
    
    
    5,681
    
    
    
    21,125Total other income
    
    
    19,114,379
    
    
    
    8,420,010
    
    
    
    6,733,620Income (loss) before income taxes
    
    
    22,752,943
    
    
    
    (12,873,200
    )
    
    
    (3,199,080
    )Income tax benefit (provision):Deferred
    
    
    
    
    
    
    
    
    
    
    1,793,215Current
    
    
    (2,886,485
    )
    
    
    (44,267
    )
    
    
    (3,426,085
    )Income (loss) from continuing operations
    
    
    19,866,458
    
    
    
    (12,917,467
    )
    
    
    (4,831,950
    )Discontinued operations:Income from discontinued operations
    
    
    
    
    
    
    2,283,854
    
    
    
    24,978,212Gain on sale of discontinued operations
    
    
    
    
    
    
    104,330,026
    
    
    
    Net income
    
    $
    19,866,458
    
    
    
    93,696,413
    
    
    
    20,146,262


15



---



##### 



CANTERA NATURAL GAS, LLC
AND SUBSIDIARIES
   AdditionalCommon stock
    
    
    paid-in
    
    
    Member
    
    
    Members
    
    
    Notes
    
    
    RetainedShares
    
    
    Amount
    
    
    capital
    
    
    units
    
    
    capital
    
    
    receivable
    
    
    earnings
    
    
    Total(As restated)
    
    
    
    
    
    
    
    
    
    
    (As restated)Balance, January 1, 2004 (note 1)
    
    
    75,000
    
    
    $
    750
    
    
    $
    74,999,250
    
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    $
    4,600,961
    
    
    $
    79,600,961Reorganization from C-corporation
to limited
liability company
    
    
    (75,000
    )
    
    
    (750
    )
    
    
    (74,999,250
    )
    
    
    75,000
    
    
    
    79,600,961
    
    
    
    
    
    
    
    (4,600,961
    )
    
    
    Capital contribution from member
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,225
    
    
    
    3,225,000
    
    
    
    
    
    
    
    
    
    
    
    3,225,000Member units issued to officers
in exchange for notes receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,500
    
    
    
    4,500,000
    
    
    
    (4,500,000
    )
    
    
    
    
    
    
    Accrued interest on notes receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    123,750
    
    
    
    (123,750
    )
    
    
    
    
    
    
    Net income (as restated)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,146,262
    
    
    
    
    
    
    
    
    
    
    
    20,146,262Balance, December 31, 2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    82,725
    
    
    
    107,595,973
    
    
    
    (4,623,750
    )
    
    
    
    
    
    
    102,972,223Accrued interest on notes receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    58,254
    
    
    
    (58,254
    )
    
    
    
    
    
    
    Repayment of notes receivable and
accrued interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,682,004
    
    
    
    
    
    
    
    4,682,004Capital contribution from member
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    250
    
    
    
    39,188,410
    
    
    
    
    
    
    
    
    
    
    
    39,188,410Distributions to member
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (201,871,897
    )
    
    
    
    
    
    
    
    
    
    
    (201,871,897
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    93,696,413
    
    
    
    
    
    
    
    
    
    
    
    93,696,413Balance, December 31, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    82,975
    
    
    
    38,667,153
    
    
    
    
    
    
    
    
    
    
    
    38,667,153Distributions to member
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,000,000
    )
    
    
    
    
    
    
    
    
    
    
    (3,000,000
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,866,458
    
    
    
    
    
    
    
    
    
    
    
    19,866,458Balance, December 31, 2006
    
    
    
    
    
    $
    
    
    
    $
    
    
    
    
    82,975
    
    
    $
    55,533,611
    
    
    $
    
    
    
    $
    
    
    
    $
    55,533,611


16



---



##### 



CANTERA NATURAL GAS, LLC
AND SUBSIDIARIES
   2006
    
    
    2005
    
    
    2004(As restated)
    
    
    (As restated)
    
    
    (As restated)Cash flows from operating activities:Net income
    
    $
    19,866,458
    
    
    
    93,696,413
    
    
    
    20,146,262Adjustment to reconcile net income to net cash
provided by (used in) operating activities:Depreciation
    
    
    670,982
    
    
    
    773,461
    
    
    
    6,810,966Bad debt expense
    
    
    
    
    
    
    17,236
    
    
    
    Gain on sale of assets
    
    
    
    
    
    
    (104,330,026
    )
    
    
    (82,619
    )Amortization of deferred financing costs
    
    
    136,475
    
    
    
    1,971,558
    
    
    
    548,761Deferred income taxes
    
    
    
    
    
    
    (15,127
    )
    
    
    (1,793,215
    )Equity in earnings of unconsolidated subsidiaries
    
    
    (20,036,639
    )
    
    
    (10,768,626
    )
    
    
    (8,693,406
    )Distributions from unconsolidated subsidiaries
    
    
    20,202,264
    
    
    
    12,495,022
    
    
    
    7,487,463Changes in operating assets and liabilities:Accounts receivable
    
    
    (2,634,656
    )
    
    
    5,757,859
    
    
    
    (5,517,626
    )Product inventory
    
    
    
    
    
    
    825,142
    
    
    
    (2,060,036
    )Prepaid expenses and other assets
    
    
    90,622
    
    
    
    255,718
    
    
    
    (518,002
    )Accounts payable
    
    
    (2,897,706
    )
    
    
    503,613
    
    
    
    9,712,785Accrued liabilities
    
    
    (116,778
    )
    
    
    (3,871,103
    )
    
    
    8,606,600Income taxes payable
    
    
    227,297
    
    
    
    214,859
    
    
    
    (1,063,747
    )Net cash provided by (used in)
operating activities
    
    
    15,508,319
    
    
    
    (2,474,001
    )
    
    
    33,584,186Cash flows from investing activities:Investment in unconsolidated subsidiaries
    
    
    (4,095,775
    )
    
    
    (17,103,273
    )
    
    
    (2,465,240
    )Capital expenditures
    
    
    (88,297
    )
    
    
    (650,371
    )
    
    
    (3,397,315
    )Purchase price revaluation
    
    
    
    
    
    
    
    
    
    
    (1,343,780
    )Proceeds on sale of assets, net of transaction costs and
cash sold
    
    
    
    
    
    
    192,674,797
    
    
    
    82,619Net cash provided by (used in)
investing activities
    
    
    (4,184,072
    )
    
    
    174,921,153
    
    
    
    (7,123,716
    )Cash flows from financing activities:Repayment on credit facility
    
    
    
    
    
    
    (38,400,000
    )
    
    
    (6,600,000
    )Payments on capital lease obligations
    
    
    
    
    
    
    
    
    
    
    (101,670
    )Repayment of notes receivable from employees
    
    
    
    
    
    
    4,682,004
    
    
    
    Capital contributions from member
    
    
    
    
    
    
    33,588,410
    
    
    
    3,225,000Distributions to member
    
    
    (3,000,000
    )
    
    
    (201,871,897
    )
    
    
    Deferred financing costs
    
    
    (15,914
    )
    
    
    (249,847
    )
    
    
    (185,896
    )Net cash used in financing activities
    
    
    (3,015,914
    )
    
    
    (202,251,330
    )
    
    
    (3,662,566
    )Net increase (decrease) in cash and
cash equivalents
    
    
    8,308,333
    
    
    
    (29,804,178
    )
    
    
    22,797,904Cash and cash equivalents, beginning of year
    
    
    6,257,031
    
    
    
    36,061,209
    
    
    
    13,263,305Cash and cash equivalents, end of year
    
    $
    14,565,364
    
    
    
    6,257,031
    
    
    
    36,061,209Supplemental disclosure of cash flow information:Cash paid during the year for:Interest
    
    $
    1,265,052
    
    
    
    677,756
    
    
    
    2,281,044Income taxes
    
    
    2,045,516
    
    
    
    44,267
    
    
    
    1,455,276Noncash financing activities:Settlement of accrued compensation liability by parent on
behalf of Company
    
    $
    
    
    
    
    5,600,000
    
    
    
    


17



---



##### 



CANTERA NATURAL GAS, LLC
AND SUBSIDIARIES
    (1)
    
    Organization and BusinessCantera Natural Gas, LLC (Cantera LLC or the Company), a Delaware limited liability company,
is a wholly owned subsidiary of Cantera Resources Holdings, LLC (Parent) and the successor to
Cantera Natural Gas, Inc. (Cantera Inc.). Cantera LLC was formed to facilitate a change in tax
status from a taxable entity to a nontaxable entity on January 2, 2004 (see note 6). The
members liability is limited to the amount of capital contributed and the Companys
accumulated earnings.The Company provides natural gas gathering and processing and related services, which include
compression, treatment, transportation, and natural gas liquids (NGLs) extraction services for
natural gas producers. Such services are provided primarily to customers in Wyoming and
Louisiana.(2)
    
    Summary of Significant Accounting Policies
 (a)
    
    Consolidated SubsidiariesThe Company consolidates entities in which its ownership is greater than 50%, and/or for
entities for which the Company has control over the operations by means of its ownership
interest or representation on the investees management committee or board of directors.
The accompanying consolidated financial statements include the accounts of its wholly
owned subsidiaries, Cantera Field Services, LLC and Cantera Gas Holdings, LLC.(b)
    
    Unconsolidated SubsidiariesThe Company uses the equity method of accounting for entities where its ownership is
between 20% and 50% and/or for entities where the Company does not control the investee
company by means of its ownership interest or representation on the investees management
committee or board of directors.In connection with the acquisition of its initial operating assets, the Company acquired
noncontrolling interests in two gas gathering entities, Bighorn Gas Gathering, LLC
(Bighorn), 51% and Fort Union Gas Gathering, LLC (Ft. Union) 33.33%. In August 2005, the
Company purchased a portion (3.71%) of another Ft. Union members interest and now has a
37.04% interest in Ft. Union. The Company has a 50% representation on the management
committee of Bighorn, and does not control Bighorn. The Companys representation in Ft.
Union is equal to its member interest. Accordingly, both of these entities are accounted
for under the equity method in the accompanying consolidated financial statements (see
note 4).


18



---



##### 



CANTERA NATURAL GAS, LLC
AND SUBSIDIARIES
   (c)
    
    Use of EstimatesThe preparation of the consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.(d)
    
    Gas Gathering and Processing and Natural Gas Liquids OperationsThe Companys revenue is derived from the sale of residue gas, NGLs, and fees collected
for gathering and transporting natural gas. Revenue is recognized once the Company can
conclude it has evidence of an arrangement, the sales or fees are fixed or determinable,
collectibility is probable and delivery has occurred. The Company records revenue on its
residue gas sales on a gross basis as it obtains title and takes physical delivery of gas
purchased, and bears the risk of loss and credit exposure on these transactions. The
Company typically enters into long-term contracts that provide for per-unit gathering and
transportation fees. Fees are determined on a monthly basis based upon actual delivered
volumes. The Company assesses collectibility at the inception of an arrangement based
upon credit ratings and prior collections history. In general, the Company conducts
business with a static customer base with which the Company has had a long collection
history. As a result, the Company has not experienced significant credit losses, nor has
its revenue recognition been impacted due to assessments of collectibility. Costs are
expensed as incurred.(e)
    
    Cash and Cash EquivalentsThe Company considers all highly liquid investments with maturities when purchased of
three months or less to be cash equivalents.(f)
    
    ImbalancesThe Companys activities periodically result in imbalances whereby the Companys
customers have either over- or under-delivered natural gas to the Companys system. Cost
for pipeline imbalances is determined based on the Companys weighted average cost of
gas, using the first-in, first-out method, during the month in which the imbalance was
created. Net positive imbalances, representing under deliveries from customers, are
recorded as gas imbalance inventory, whereas net negative imbalances, representing over
deliveries from customers, are recorded as a liability. The cost of NGL inventory is
determined based on the weighed average cost of gas, including transportation and
carrying charges. At December 31, 2006 and 2005, the Company had no gas imbalances, and
had net positive NGL imbalances of $771,761 and $287, respectively, which are included in
prepaid expenses and other in the accompanying consolidated balance sheets.(g)
    
    Property, Plant, and EquipmentProperty, plant, and equipment are recorded at cost. Maintenance and repairs are charged
to expense as incurred. Expenditures that extend the useful lives of assets are
capitalized. When assets are retired or otherwise disposed of, the cost of the assets and
the related accumulated depreciation are removed from the accounts. Any gain or loss on
retirements is reflected in other income in the year


19



---



##### 



CANTERA NATURAL GAS, LLC
AND SUBSIDIARIES
   in which the asset is disposed. Depreciation is provided on a straight-line basis over
the estimated useful life for each asset. Property, plant, and equipment consist of the
following:
 December
31Useful lives
    
    
    2006
    
    
    2005Processing and gathering systems
    
    15 - 20 years
    
    $
    7,549,920
    
    
    
    7,505,659Vehicles, equipment, and tools
    
    3 years
    
    
    22,475
    
    
    
    22,475Furniture and computer equipment
    
    3 years
    
    
    863,013
    
    
    
    818,9778,435,408
    
    
    
    8,347,111Less accumulated depreciation
    
    
    
    
    
    
    (2,527,867
    )
    
    
    (1,856,885
    )Net property, plant, and equipment
    
    
    
    
    
    $
    5,907,541
    
    
    
    6,490,226
 (h)
    
    Asset ImpairmentThe Company evaluates its property, plant, and equipment for impairment whenever events
or circumstances indicate the carrying values may not be realizable. An impairment loss
is recorded for assets to be held and used when its carrying amount is not recoverable
from future estimated cash flows and exceeds its fair value. Assets classified as
held-for-sale are recorded at the lower of their carrying amount or fair value less cost
to sell. During the years ended December 31, 2006, 2005, and 2004, management identified
no indications of potential impairment of the Companys long-lived assets.(i)
    
    Deferred Financing CostsCosts associated with securing debt are capitalized and amortized over the term of the
associated debt. The Company incurred $15,914 and $249,847 of costs in 2006 and 2005,
respectively, associated with its credit facility. During 2005, the Company amended its
credit agreement and wrote off $1,281,358 of deferred financing costs to interest
expense. In addition, during the years ended December 31, 2006, 2005, and 2004, the
Company recorded interest expense of $136,476, $690,200, and $548,761, respectively,
relating to the amortization of deferred financing costs.(j)
    
    Fair Value of Financial InstrumentsThe Companys financial instruments consist of cash, accounts receivable, accounts
payable, other current liabilities, and debt. Except for debt, the carrying amounts of
financial instruments approximate fair value due to their short maturities. At
December 31, 2006 and 2005, based on rates available for similar types of debt, the fair
value of debt approximated its carrying amount.(k)
    
    Concentration of Credit RiskSubstantially all of the Companys accounts receivable at December 31, 2006 and 2005
result from the sale of natural gas and NGLs to, and gas gathering fees earned from
companies in the oil and gas industry. This concentration of customers may impact the
Companys overall credit risk, either


20



---



##### 



CANTERA NATURAL GAS, LLC
AND SUBSIDIARIES
   positively or negatively, in that these entities may be similarly affected by
industry-wide changes in economic or other conditions. Such receivables are generally not
collateralized. However, the Company performs credit evaluations on all its customers to
minimize exposure to credit risk. During 2006, 2005, and 2004, credit losses were not
significant.As of December 31, 2006, trade accounts receivable includes receivables from five
customers representing 26%, 23%, 13%, 13%, and 11% of total accounts receivable. As of
December 31, 2005, trade accounts receivable includes receivables from three customers
representing 49%, 21%, and 13% of total accounts receivable.For the year ended December 31, 2006, revenue includes sales to two customers
representing 71% and 11% of total revenue. For the year ended December 31, 2005, revenue
includes sales to one customer representing 73% of total revenue. For the year ended
December 31, 2004, revenue includes sales to three customers representing 14%, 14%, and
13% of total revenue. Remaining customers individually account for less than 10% of total
revenue.(l)
    
    Income TaxesOn January 2, 2004, the Company changed its tax status from a C Corporation (taxable
entity) to a limited liability company (nontaxable entity). With the conversion to a
limited liability company, the Company is no longer subject to income tax. Instead, the
tax effects from the Companys operations pass through to the Companys owner.(m)
    
    Equity-Based CompensationEffective January 1, 2006, the Company adopted the fair value method of accounting for
share-based compensation arrangements in accordance with Financial Accounting Standards
Board (FASB) Statement No. 123 (revised 2004), Share-Based Payment(SFAS 123R), using the
prospective method of adoption. Under the provisions of SFAS 123R, the estimated fair
value of options granted under the Companys Option Plan is recognized as compensation
over the option-vesting period. Using the prospective method of adoption, SFAS 123R is
applied only to awards granted, modified, repurchased, or canceled after the adoption of
Statement 123R. The prospective method of adoption does not permit Statement 123R to be
applied to the nonvested portion of awards outstanding at the date of initial
application.Prior to January 1, 2006, the Company accounted for share-based compensation arrangements
using the intrinsic value method of accounting in accordance with Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees(APB 25), and its related
interpretations. Under the provisions of APB 25, the Company did not recognize
compensation expense with respect to issuances of options for member units under the
Option Plan as all options were granted with exercise prices greater than the estimated
fair value of the member units on the date of grant.In connection with the sale of the Mid Continent Division in 2005, the Company recognized
$4.4 million of compensation expense in 2005 related to the cash settlement of options
for 3,065 member units issued to employees. Of this amount, $3.3 million is attributable
to continuing operations and $1.1 million is attributable to discontinued operations. In
addition, the Company paid


21



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##### 



CANTERA NATURAL GAS, LLC
AND SUBSIDIARIES
   cash bonuses of $8.7 million. The total cash payment of $12.0 million related to
continuing operations is included in general and administrative expenses in the
accompanying consolidated statements of operations.In 2004, the Company recognized $5.6 million of compensation expense in connection with
notes issued to officers in exchange for member units. (See note 7).(n)
    
    Comprehensive IncomeComprehensive income includes all changes in equity during a period from nonowner
sources. During the years ended December 31, 2006, 2005, and 2004, the Company had no
transactions that were required to be reported as adjustments to net income to determine
comprehensive income.(o)
    
    Derivative Financial InstrumentsSFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended,
establishes accounting and reporting standards for derivatives and requires that every
derivative instrument be recorded on the balance sheet at fair value as either an asset
or liability. The statement requires that changes in the derivatives fair value be
recognized currently in earnings unless specific hedge accounting criteria are met. The
Company did not enter into derivative financial transactions that did not qualify as
normal purchases and sales under the requirements of the statement in 2006, 2005, or
2004.
 (3)
    
    RestatementThe consolidated balance sheets as of December 31, 2006 and 2005, the consolidated statement
of operations for the year ended December 31, 2004, and the consolidated statements of
members equity and consolidated statements of cash flows for the years ended December 31,
2006, 2005, and 2004 have been restated to correct for certain accounting and reporting
errors.
 (a)
    
    Difference in Equity InvestmentsOn July 2, 2003, the Company acquired all the shares of capital stock of CMS Field
Services, Inc., including the Companys investments in Bighorn and Ft. Union (see
note 4). At the date of acquisition, the Companys cost of those investments was
different from the underlying equity in the net assets of the investees. Commencing
January 1, 2005, the Company prospectively accounted for these differences through
adjustments to the equity in earnings of affiliates in its statements of operations, as
required by Accounting Principles Board Opinion No. 18, The Equity Method of Accounting
for Investments in Common Stock. The Company has restated its consolidated balance sheets
as of December 31, 2006 and 2005, and its consolidated statements of operations,
consolidated members equity and consolidated cash flows for the year ended December 31,
2004, to give effect to this accounting treatment commencing July 2, 2003, the date of
acquisition.(b)
    
    Distributions Received from Equity InvestmentsThe Company previously reflected distributions received from its equity investments in
Bighorn and Ft. Union as investing activities in its consolidated statements of cash
flows. Because the distributions constitute a return on investment, the Company has
restated its consolidated


22



---



##### 



CANTERA NATURAL GAS, LLC
AND SUBSIDIARIES
   statements of cash flows for the years ended December 31, 2006, 2005, and 2004, to
reflect those distributions as cash flows from operating activities as required by
Statement of Financial Accounting Standards No. 95, Statement of Cash Flows.The following provides a summary of the restated accounts:
 As reported
    
    Adjustment
    
    As restatedConsolidated balance sheet:December 31, 2006:Equity method investments
    
    $
    42,000,139
    
    
    
    715,391
    A
    
    
    42,715,530Members equity
    
    
    54,818,220
    
    
    
    715,391
    A
    
    
    55,533,611December 31, 2005:Equity method investments
    
    $
    38,069,989
    
    
    
    715,391
    A
    
    
    38,785,380Members equity
    
    
    37,951,762
    
    
    
    715,391
    A
    
    
    38,667,153Consolidated statement of operations:Year ended December 31, 2004:Equity in earnings of affiliates
    
    $
    6,919,034
    
    
    
    1,774,372
    B
    
    
    8,693,406Income tax benefit (provision)  deferred
    
    
    2,198,275
    
    
    
    (405,060
    )C
    
    
    1,793,215Net income
    
    
    18,776,950
    
    
    
    1,369,312
    
    
    
    20,146,262Consolidated statement of members equity:Total members equity:January 1, 2004
    
    $
    80,254,882
    
    
    
    (653,921
    )D
    
    
    79,600,961December 31, 2004
    
    
    102,256,832
    
    
    
    715,391
    A
    
    
    102,972,223December 31, 2005
    
    
    37,951,762
    
    
    
    715,391
    A
    
    
    38,667,153December 31, 2006
    
    
    54,818,220
    
    
    
    715,391
    A
    
    
    55,533,611
 
 A
    
    Adjustment for accumulated differences in equity method investments from
2003 and 2004.B
    
    Adjustment for 2004 amortization of differences in equity method investments
and 2004 income from equity method investments.C
    
    Adjustment for deferred income tax effect of differences in 2003 income from
equity method investment adjustments, in connection with January 1, 2004 conversion
from C Corporation to a limited liability corporation.D
    
    Adjustment for 2003 amortization of differences in equity method investments
and 2003 income from equity method investments, net of deferred income tax benefit
of $405,060.


23



---



##### 



CANTERA NATURAL GAS, LLC
AND SUBSIDIARIES
   Consolidated statementsof cash flows
    
    As reported
    
    Adjustment
    
    As restatedYear ended December 31, 2006:Cash flows from operating activities:Distributions from
unconsolidated subsidiaries
    
    $
    
    
    
    
    20,202,264
    
    
    
    20,202,264Net cash provided by
(used in) operating
activities
    
    
    (4,693,945
    )
    
    
    20,202,264
    
    
    
    15,508,319Cash flows from investing
activities:Distributions from
unconsolidated subsidiaries
    
    $
    20,202,264
    
    
    
    (20,202,264
    )
    
    
    Net cash provided by
(used in) investing
activities
    
    
    16,018,192
    
    
    
    (20,202,264
    )
    
    
    (4,184,072
    )Year ended December 31, 2005:Cash flows from operating
activities:Distributions from
unconsolidated subsidiaries
    
    $
    
    
    
    
    12,495,022
    
    
    
    12,495,022Net cash provided by
(used in) operating
activities
    
    
    (14,969,023
    )
    
    
    12,495,022
    
    
    
    (2,474,001
    )Cash flows from investing
activities:Distributions from
unconsolidated subsidiaries
    
    $
    12,495,022
    
    
    
    (12,495,022
    )
    
    
    Net cash provided by
(used in) investing
activities
    
    
    187,416,175
    
    
    
    (12,495,022
    )
    
    
    174,921,153


24



---



##### 



CANTERA NATURAL GAS, LLC
AND SUBSIDIARIES
   Consolidated statementsof cash flows
    
    As reported
    
    Adjustment
    
    As restatedYear ended December 31, 2004:Cash flows from operating
activities:Net income
    
    $
    18,776,950
    
    
    
    1,369,312
    
    
    
    20,146,262Deferred income taxes
    
    
    (2,198,275
    )
    
    
    405,060
    
    
    
    (1,793,215
    )Equity in earnings of
unconsolidated subsidiaries
    
    
    (6,919,034
    )
    
    
    (1,774,372
    )
    
    
    (8,693,406
    )Distributions from
unconsolidated subsidiaries
    
    
    
    
    
    
    7,487,463
    
    
    
    7,487,463Net cash provided by
operating activities
    
    
    26,096,723
    
    
    
    7,487,463
    
    
    
    33,584,186Cash flows from investing activities:Distributions from
unconsolidated subsidiaries
    
    $
    7,487,463
    
    
    
    (7,487,463
    )
    
    
    Net cash provided by (used in)
investing activities
    
    
    363,747
    
    
    
    (7,487,463
    )
    
    
    (7,123,716
    )
 (4)
    
    Equity Method InvestmentsThe Company accounts for its investments in Bighorn and Ft. Union using the equity method of
accounting. The Company owns noncontrolling interests of 51% and 37.04%, respectively, in
Bighorn and Ft. Union, and has ability to exercise significant influence. Under the equity
method, the Company adjusts the carrying amount of its investment for its share of the
earnings or losses and reports the earnings or losses in its consolidated statement of
operations. Distributions received reduce the carrying amounts of the investments. The Company
is also responsible for funding project expenditures for Bighorn either in part, if the other
Bighorn partner approves the project, or in total if the other Bighorn partner does not
approve the project.Distributions are classified in the consolidated statements of cash flows as either operating
or investing activities. The Company determines the nature of the cash distributions by
comparing cumulative distributions received by the investor to the investors cumulative
equity in the earnings from the investee. To the extent that distributions are equal to or
less than cumulative equity in earnings of the investee, such distributions represent returns
on investment and are classified as operating activities. To the extent that distributions
exceed cumulative equity in earnings of the investee, such distributions represent returns of
investment, which are classified as investing activities. To date, cumulative equity in
earnings has exceeded distributions and accordingly all distributions have been classified as
operating activities. As discussed in note 3, the accompanying consolidated statements of cash
flows have been restated to reflect this classification.


25



---



##### 



CANTERA NATURAL GAS, LLC
AND SUBSIDIARIES
   Upon the acquisition of these investments, there were differences between the purchase price
allocated to the investments and the underlying equity of the subsidiaries attributable to the
Companys interest. The Company is amortizing these differences based upon the hypothetical
purchase price allocation to the assets and liabilities of the subsidiaries as if the Company
were consolidating these companies. With respect to the Companys investment in Bighorn, the
underlying equity of Bighorn attributable to the Company was greater than the purchase price
allocated to the Companys investment. The impact of recording this negative goodwill would be
to reduce the carrying amount of Bighorns long-lived assets, and, in turn, reduce the future
depreciation expense. With respect to the Companys investment in Fort Union, the purchase
price allocated to the Companys investment was greater than the underlying equity, which was
a result of fair values of long-lived assets that exceeded their carrying amounts. The impact
of recording the excess fair value of Ft. Unions long-lived assets would be to increase its
carrying amount and, accordingly, increase future depreciation expense. As a result, the
difference between the carrying amount of the Companys equity method investment and the
underlying equity attributable to the Companys interest is being amortized over the remaining
useful lives of the underlying long-lived assets, which range from 25 to 30 years.
Accordingly, significant differences between the carrying amount of the investments and the
underlying equity attributable to the Companys interest exists as of December 31, 2006 and
2005.The carrying value of the Companys equity method investments consists of the following:
 December 312006
    
    
    2005Bighorn
    
    $
    19,627,339
    
    
    
    17,890,834Fort Union
    
    
    23,088,191
    
    
    
    20,894,546$
    42,715,530
    
    
    
    38,785,380
  Year ended December 312006
    
    2005
    
    2004Results of operations:Revenue
    
    $
    56,847,413
    
    
    
    43,915,032
    
    
    
    38,682,717Operating income
    
    
    41,055,532
    
    
    
    30,432,758
    
    
    
    24,925,940Net income
    
    
    41,092,441
    
    
    
    27,497,290
    
    
    
    22,327,566Cash flows:Operating activities
    
    $
    46,708,883
    
    
    
    34,695,136
    
    
    
    27,630,863Investing activities
    
    
    (7,208,965
    )
    
    
    (10,604,245
    )
    
    
    (6,283,431
    )Financing activities
    
    
    (35,346,226
    )
    
    
    (21,605,956
    )
    
    
    (24,117,529
    )


26



---



##### 



CANTERA
NATURAL GAS, LLC
AND SUBSIDIARIES
 
 December 312006
    
    2005Balance sheet:Current assets
    
    $
    21,141,378
    
    
    
    18,328,522Total assets
    
    
    167,195,588
    
    
    
    163,085,116Current liabilities
    
    
    22,113,093
    
    
    
    15,036,213Total liabilities
    
    
    36,978,648
    
    
    
    37,770,218Partners equity
    
    
    130,216,940
    
    
    
    125,314,898
 (5)
    
    DebtDuring 2004, the Company had a $55,000,000 term loan and $20,000,000 revolving credit facility
with a bank, as amended on December 31, 2003. On March 3, 2005 in conjunction with the sale of
the Mid-Continent Division (see note 10), the Company amended the Credit Agreement to be a
$10,000,000 term loan and a $30,000,000 revolving credit facility (the Credit Agreement). The
Credit Agreement was amended on April 26, 2006 and on October 5, 2006; however, the
significant terms and conditions were not modified. The Credit Agreement is secured by the
tangible assets of the Company and is available through March 3, 2008.Interest on Eurodollar Borrowings under the Credit Agreement is equal to the Adjusted LIBOR,
as defined in the Credit Agreement, for the interest period in effect for such borrowings plus
the Applicable Margin for the day borrowed. Interest on alternative Base Rate Borrowings
(Prime) under the Credit Agreement is equal to the Alternate Base Rate, as defined in the
Credit Agreement, plus the Applicable Margin for the day borrowed. The Applicable Margin
fluctuates between 0.75% to 2.5% for borrowings under Prime, and between 1.75% and 2.75% for
borrowings under LIBOR, depending upon the Companys debt coverage ratios (as stipulated in
the Credit Agreement) at the time of borrowing. Additionally, the Credit Agreement has annual
commitment fees ranging from 0.375% to 0.500% of the unused borrowing capacity, depending upon
the Companys debt coverage ratios (as stipulated in the Credit Agreement). At December 31,
2006 and 2005, $10,000,000 was outstanding under the Credit Agreement at weighted average
interest rates of 7.64% and 5.44%, respectively.The Credit Agreement contains financial covenants that require the Company to maintain certain
fixed charge coverage, as well as certain debt coverage and working capital ratios.


27



---



##### 



CANTERA NATURAL GAS, LLC
AND SUBSIDIARIES
   (6)
    
    Income TaxesFor the year ended December 31, 2004, in connection with the Companys change in tax status
from a taxable entity to a nontaxable entity, the Company accrued income taxes of $3,426,085
based on the difference between the fair value of the Companys assets and liabilities and the
tax basis of the Companys assets and liabilities on the date of the Companys change in tax
status (January 2, 2004). As a result, for the year ended December 31, 2004, the Company
recorded net tax expense of $1,632,870 representing the income taxes accrued of $3,426,085
less the reversal of the Companys deferred tax liability of $1,793,215. The deferred tax
liability of $1,793,215 as of January 1, 2004 has been restated for the impact of the
misstatement of equity in earnings of affiliates for the period ended December 31, 2003 (see
note 3). Because the decision to change tax status was a corporate decision, the impact of
conversion from a taxable entity to a nontaxable entity has been reflected in continuing
operations, and no amounts have been allocated to discontinued operations for the years ended
December 31, 2005 and 2004. With the change in tax status, the Company also derecognized its
entire tax liability.In 2004, the Company recorded an $840,969 income tax receivable in connection with its final C
Corporation income tax return. The Companys final return was under review by the Internal
Revenue Service (IRS), and a final settlement was reached in September 2006. The net
settlement required a $2,045,516 payment by the Company, and the receivable with the IRS was
reversed, resulting in $2,886,485 of current tax expense for the year ended December 31, 2006.
Interest paid in connection with the settlement was $398,816.As of December 31, 2006 and 2005, the Companys consolidated balance sheet reflected an income
tax liability for other contingencies related to the reorganization of the Company of
$3,172,502 and $2,945,205, respectively, including accrued interest payable of $488,993 and
$261,696, respectively. For the years ended December 31, 2006, 2005, and 2004, the Company
recorded interest expense of $227,297, $171,654, and $90,042, respectively.(7)
    
    Equity-Based Compensation and Bonuses
 (a)
    
    OptionsThe Company established the 2004 Option Plan (the Plan), whereby employees may be granted
options to purchase up to a total of 4,963.5 member units. As of December 31, 2006,
options for 1,960 member units were held by employees with an exercise price of $340 per
unit. Under the Plan, the exercise price of each option shall be at least equal to the
estimated fair value of the Companys member units on the date of grant. The options
granted have a maximum term of ten years and vest 25% on each anniversary date from the
date of grant. The exercise price of $340 was greater than the estimated fair value of
the underlying member units at the date of grant. As a result, the Company has not
recognized compensation expense in the accompanying consolidated statements of operations
for the options granted.In March 2005, in connection with the sale of Mid Continent Division, all of the then
outstanding options were canceled in exchange for cash payments to the holders
aggregating to approximately $4.4 million. The Company recorded the cash settlement as
compensation expense in the accompanying 2005 statement of operations. Of this amount
approximately $3.3 million was


28



---



##### 



CANTERA NATURAL GAS, LLC
AND SUBSIDIARIES
   attributable to continuing operations and is included in the 2005 consolidated statement
of operations in general and administration expense. The remaining $1.1 million is
attributable to employees of the Mid Continent Division (see note 10) and is included in
income from discontinued operations in the 2005 consolidated statement of operations.A summary of the activity of the Plan is presented in the table below:
 Weightedaverage
    
    Exerciseshares
    
    priceOutstanding, January 1, 2004
    
    
    
    
    
    $
    Granted
    
    
    3,065
    
    
    
    1,000Exercised
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Outstanding, December 31, 2004
    
    
    3,065
    
    
    
    1,000Granted
    
    
    1,960
    
    
    
    340Exercised
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Canceled
    
    
    (3,065
    )
    
    
    1,000Outstanding, December 31, 2005
    
    
    1,960
    
    
    
    340Granted
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Outstanding, December 31, 2006
    
    
    1,960
    
    
    
    340Exercisable, December 31, 2006
    
    
    490
    
    
    
    340
 At December 31, 2006, outstanding options have weighted average remaining contractual
lives of 8.5 years.(b)
    
    Notes ReceivableIn June 2004, the Company loaned three officers of the Company an aggregate of $4,500,000
in exchange for three notes receivable (the Notes). The officers used the proceeds from
the Notes to purchase an aggregate of 4,500 member units from the Parent. The Parent used
the proceeds from the sale of member units to the officers to purchase 4,500 shares of
member units from the Company.The principal and interest obligations for the Notes were without recourse to the
officers personal assets, and were considered variable options for financial reporting
purposes. As a result, at each reporting date, the Company re-measured the fair value of
the underlying member units. To the extent that the fair value of the underlying member
units exceeded the principal and cumulative interest on the Notes and such amounts
remained outstanding under the Notes, the Company was
required to recognize compensation expense in its statements of operations until such
time that the


29



---



##### 



CANTERA NATURAL GAS, LLC
AND SUBSIDIARIES
   Notes were repaid. Interest on the Notes was recorded as an adjustment to
the members capital. As of December 31, 2004, the estimated fair value of the underlying
member units exceeded the principal and cumulative interest under the nonrecourse Notes,
and as a result, compensation expense of $5,600,000 was recognized in 2004. The resulting
liability that was recorded in 2004 in anticipation of the sale of discontinued
operations and related distributions was settled by the Parent in 2005.(c)
    
    Corporate BonusesIn connection with the sale of the Mid Continent assets, Cantera LLC paid approximately
$8.7 million in cash bonuses to employees of Cantera LLC. As these employees are general
corporate employees who were not directly related to the Mid Continent Division and who
have continued employment with the Company, the compensation expense associated with
these payments is included in the accompanying statement of operations.
 (8)
    
    Transactions with Affiliated/Related PartiesDuring the years ended December 31, 2006, 2005, and 2004, the Company provided services to
Canyon Gas Resources, LLC (Canyon), Bighorn, and Ft. Union, all affiliated entities of the
Company, under management agreements with indefinite terms (the Management Services
Agreements). The Management Services Agreements provide a basic fee payable to the Company
commensurate with services rendered each month. For the years ended December 31, 2006, 2005,
and 2004, the fees earned were $2,194,873, $2,289,364, and $841,320, respectively. The
management fees were originally reported in the 2005 and 2004 consolidated financial
statements as a reduction to general and administrative expense. Though not significant to the
consolidated financial statements taken as a whole, the 2005 and 2004 consolidated financial
statements have been revised to present management fees as a separate component of revenue.As of December 31, 2006 and 2005, the Company had accounts receivable from related parties of
$4,519,129 and $2,290,069, respectively. As of December 31, 2006, the accounts receivable
consist of $4,330,670 receivable from Bighorn and Ft. Union for member distributions, $188,450
receivable from Canyon, Bighorn, and Ft. Union related to amounts due in connection with the
Management Services Agreement and reimbursable expenses, and $9 for gathering and
transportation billing adjustments and imbalance cash-outs related to contracts discussed
below. As of December 31, 2005, the accounts receivable consist of $1,495,914 receivable from
Bighorn and Ft. Union for member distributions, $91,099 receivable from Canyon, Bighorn and
Ft. Union related to amounts due in connection with the Management Services Agreement and
reimbursable expenses, and $703,056 for gathering and transportation billing adjustments and
imbalance cash-outs related to contracts discussed below.The Company has gathering contracts with both Bighorn and Ft. Union, whereby the Company pays
fees to Bighorn and Ft. Union to gather and transport its gas. For the years ended
December 31, 2006, 2005, and 2004, the total fees paid to Bighorn were $799,914, $909,283, and
$444,594, respectively, and the total fees paid to Ft. Union were and $5,605,611, $7,481,471,
and $7,374,402, respectively. As of December 31, 2006 and 2005, the Company owed $296,155 and
$832,371, respectively, in connection with these services. Related to these services are
billing adjustments and imbalance cash-outs. As of December 31, 2006 and 2005, the Company has
receivables of $9 and $703,056, respectively, relating to the adjustments.


30



---



##### 



CANTERA NATURAL GAS, LLC
AND SUBSIDIARIES
   The Company is responsible for funding project expenditures for Bighorn either in part, if the
Bighorn partners approve the project, or in total for projects proposed by the Company but for
which the other Bighorn partner does not approve. As of December 31, 2006 and 2005, the
Company had capital projects payables to Bighorn of $174,898 and $2,143,881, respectively.(9)
    
    Commitments and Contingencies
 (a)
    
    Contingent PaymentIn 2003, the Company acquired the operating assets of the Company from CMS Gas
Transmission Company (CMS). In addition to cash paid in the acquisition, the Company
issued a Contingent Consideration Note to CMS, dated as of July 2, 2003, that provided
for annual payments to CMS in 2005 through 2009 contingent upon Bighorn and Ft. Union
achieving certain earnings thresholds in 2004 through 2008. If the earnings threshold is
met for a given year, the payment for that year is due in March of the following year.
The Contingent Consideration Note is subordinated to all senior indebtedness of the
Company, and payments shall not exceed $50,000,000 in the aggregate. If the earnings
threshold is not met for a given year, the liability for that year rolls forward one year
and adds to the maximum contingent payment due the following year, and then expires if
not paid by the end of such following year. The earnings thresholds were not met in 2004,
2005 or 2006; therefore, there are no payments due in 2005, 2006 or 2007. Because the
earnings thresholds were not met in 2004, 2005 or 2006, the 2004 and 2005 contingent
payments of $7,500,000 and $9,166,667, respectively, expired, and the 2006 contingent
payment of $10,833,333 is rolled over to 2007.Pursuant to the terms of the Contingent Consideration Note, at December 31, 2006 annual
contingent payments are limited to the following:
 Original
    
    
    Contingentcontingent
    
    
    noteYear ended
    
    Payment due
    
    
    
    note
    
    
    maximumDecember 31
    
    March
    
    Status
    
    payments
    
    
    payments2004
    
    2005
    
    Expired
    
    $
    7,500,000
    
    
    
    2005
    
    2006
    
    Expired
    
    
    9,166,667
    
    
    
    2006
    
    2007
    
    Rolled to 2007
    
    
    10,833,333
    
    
    
    2007
    
    2008
    
    
    
    
    10,833,333
    
    
    
    21,666,6662008
    
    2009
    
    
    
    
    11,666,667
    
    
    
    11,666,667$
    50,000,000
    
    
    
    33,333,333
 Any payments under the Contingent Consideration Note will be recorded, when determined to
be probable, as additional purchase price and allocated to the assets acquired.(b)
    
    Firm Transportation and Gathering AgreementsThe Company is obligated under two firm transportation agreements with a third party,
whereby the Company pays for transportation whether or not the transportation capacity is
used.


31



---



##### 



CANTERA NATURAL GAS, LLC
AND SUBSIDIARIES
   The first agreement is for 67,200 million British thermal units (mmbtu) per day at the
rate of $0.145 per mmbtu, or approximately $3.6 million per year. This agreement expires
November 30, 2013. However, in 2007 the agreement was amended and restated effective
April 1, 2007 extending the expiration until December 31, 2019, with an initial rate of
$0.1434 per mmbtu decreasing to a rate of $0.115 per mmbtu as of December 1, 2013 and
continuing at that level until December 31, 2019.The second agreement is for 158,900 mmbtu per day at the rate of $0.12 per mmbtu, or
approximately $7.0 million per year through November 30, 2009, at which point the daily
volume decreases to 95,340 mmbtu per day, and continues to decline thereafter. In 2007,
this agreement was also amended and restated effective April 1, 2007, pursuant to which
the daily volume will decrease to 22,800 mmbtu per day and a rate of $0.115 per mmbtu in
2015 and continuing at that level until December 31, 2019.The two firm transportation agreement obligations are offset by Capacity Release
Agreements entered into as of March 1, 2007 with third parties. The Capacity Release
Agreements fully utilize all of the Companys firm transportation capacity through
December 31, 2019.Additionally, the Company is obligated under a firm gathering agreement with Ft. Union,
whereby the Company pays for gathering capacity whether or not the capacity is used. The
agreement is for 148,150 thousand cubic feet (mcf) per day at the rate of $0.14 per mcf,
or approximately $7.6 million per year, and expires November 30, 2009. Of the 148,150 mcf
per day commitment, 63,704 mcf per day has been sub-contracted to a third party for the
duration of the contract, reducing the Companys net commitment to 84,446 mcf per day, or
approximately $4.3 million per year.The Company entered into a second firm gathering agreement with Ft. Union on January 12,
2007 for additional firm gathering capacity under a planned pipeline expansion. This
contract becomes effective with the in-service date of the expansion, estimated to be
October 2007. The firm gathering volumes under this agreement start at 50,000 mcf per day
at the rate of $0.14 per mcf. The firm gathering volumes under this agreement increase to
75,000 mcf per day in 2008, 100,000 mcf per day in 2010, 125,000 mcf per day in 2011 and
150,000 mcf per day in 2012, at which point the daily volume will remain constant. This
agreement expires ten years from the expansion in-service date.(c)
    
    Asset retirement obligationsThe Company may be required to remove all or a portion of gas transportation surface
equipment under right of way agreements. The timing and likelihood of such removal is
uncertain, and the costs of removal are estimated to be insignificant. Accordingly, the
Company has not recorded any liability related to these obligations through December 31,
2006.(d)
    
    OtherUnder various contracts the Company is committed to gather and process natural gas. Such
contracts are based on market prices and vary in duration from one month to nine years.


32



---



##### 



CANTERA NATURAL GAS, LLC
AND SUBSIDIARIES
   From time to time, the Company is involved in legal and administrative proceedings or
claims, which arise in the ordinary course of its business. While such matters always
contain an element of uncertainty, management believes the matters of which it is aware
will not individually or in the aggregate have a material adverse effect on the Companys
financial position or results of operations.The Company establishes an accrual when an uncertainty is probable of having an adverse
effect on the Companys financial position, and such loss can be reasonably estimated.
The Company has not accrued any such amounts for the years ended December 31, 2006, 2005,
and 2004.
 (10)
    
    Discontinued Operations  Mid-ContinentOn November 22, 2004, the Company entered into a Purchase Agreement for the sale of its entire
interest in certain assets for approximately $200 million (the Disposition). The Disposition,
consummated on March 1, 2005, included all of the Companys Mid-Continent assets, but excluded
its equity investments in Big Horn and Ft. Union, and its liquefied natural gas facility
located in Lake Charles, Louisiana.Income from discontinued operations, as reflected in the consolidated statements of
operations, consists of the following:
 Year ended December 312005
    
    2004Revenue
    
    $
    47,748,445
    
    
    
    285,531,463Income from discontinued operations
    
    
    2,283,854
    
    
    
    24,978,212
 The major classes of assets and liabilities in the disposition at March 1, 2005 consisted of
the following:
 March 1, 2005Cash
    
    $
    5,381,238Accounts receivable
    
    
    35,850,366Other assets
    
    
    3,911,622Property, plant, and equipment, net of accumulated
depreciation of $8,854,188
    
    
    82,220,335Accounts payable
    
    
    33,290,270Other liabilities
    
    
    347,282
  33




---



##### 



BIGHORN GAS GATHERING, LLC
 
 June 30, 2007
    
    
    December 31, 2006AssetsCurrent assets:Cash and cash equivalents
    
    $
    5,323,900
    
    
    $
    6,277,192Accounts receivable:Trade
    
    
    2,676,214
    
    
    
    2,588,922Due from related parties
    
    
    69,950
    
    
    
    74,376Cash calls due from members
    
    
    160,533
    
    
    
    249,651Prepaid expenses
    
    
    223,388
    
    
    
    131,200Total current assets
    
    
    8,453,985
    
    
    
    9,321,341Property and equipment, net
    
    
    93,397,734
    
    
    
    94,369,030Other assets
    
    
    241,011
    
    
    
    188,347Total assets
    
    $
    102,092,730
    
    
    $
    103,878,718Liabilities and Members EquityCurrent liabilities:Accounts payable:Trade
    
    $
    556,564
    
    
    $
    579,706Due to related parties
    
    
    55,272
    
    
    
    47,161Distributions payable to members
    
    
    5,136,301
    
    
    
    5,054,070Accrued liabilities
    
    
    358,271
    
    
    
    164,603Total current liabilities
    
    
    6,106,408
    
    
    
    5,845,540Commitments and contingencies (note 4)Members equity
    
    
    95,986,322
    
    
    
    98,033,178Total liabilities and members equity
    
    $
    102,092,730
    
    
    $
    103,878,718
  34




---



##### 



BIGHORN GAS GATHERING, LLC
 
 For the Six Months ended June 30,2007
    
    
    2006Gathering fee revenue
    
    $
    13,300,699
    
    
    $
    12,315,401Expenses:Operating expenses
    
    
    3,900,205
    
    
    
    3,170,195General and administrative
    
    
    210,498
    
    
    
    285,720Depreciation
    
    
    1,979,108
    
    
    
    1,916,882Total expenses
    
    
    6,089,811
    
    
    
    5,372,797Operating income
    
    
    7,210,888
    
    
    
    6,942,604Other income:Interest income
    
    
    118,917
    
    
    
    72,832Other income
    
    
    24,375
    
    
    
    4,000Total other income
    
    
    143,292
    
    
    
    76,832Net income
    
    $
    7,354,180
    
    
    $
    7,019,436
  35




---



##### 



BIGHORN GAS GATHERING, LLC
  
 Common Member InterestsCrestone
    
    
    CrestoneCantera
    
    
    Energy
    
    
    GatheringGas Co,
    
    
    Ventures,
    
    
    Services,Inc.
    
    
    L.L.C.
    
    
    L.L.C.
    
    
    TotalBalance at January 1, 2007
    
    $
    49,996,921
    
    
    $
    38,232,939
    
    
    $
    9,803,318
    
    
    $
    98,033,178Contributions
    
    
    607,064
    
    
    
    275,505
    
    
    
    70,645
    
    
    
    953,214Re-allocation of 2007 contributions
    
    
    (120,923
    )
    
    
    96,245
    
    
    
    24,678
    
    
    
    Distributions
    
    
    (5,944,250
    )
    
    
    (3,510,000
    )
    
    
    (900,000
    )
    
    
    (10,354,250
    )Net income
    
    
    4,414,214
    
    
    
    2,339,973
    
    
    
    599,993
    
    
    
    7,354,180Balance at June 30, 2007
    
    $
    48,953,026
    
    
    $
    37,434,662
    
    
    $
    9,598,634
    
    
    $
    95,986,322
  36




---



##### 



BIGHORN GAS GATHERING, LLC
 
 For the Six Months ended June 30,2007
    
    
    2006Cash flow from operating activities:Net income
    
    $
    7,354,180
    
    
    $
    7,019,436Adjustments to reconcile net income to cash provided
by operating activities:Depreciation
    
    
    1,979,108
    
    
    
    1,916,882Gain on disposal of property and equipment
    
    
    (6,201
    )
    
    
    (4,000
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    (82,866
    )
    
    
    8,309Prepaid and other
    
    
    (92,188
    )
    
    
    (104,459
    )Accounts payable
    
    
    (15,031
    )
    
    
    (597,480
    )Accrued liabilities
    
    
    193,668
    
    
    
    157,322Net cash provided by operating activities
    
    
    9,330,670
    
    
    
    8,396,010Cash flow from investing activities:Capital expenditures
    
    
    (1,007,812
    )
    
    
    (2,624,496
    )Other assets
    
    
    (52,664
    )
    
    
    Proceeds from sale of property and equipment
    
    
    6,201
    
    
    
    4,000Net cash used in investing activities
    
    
    (1,054,275
    )
    
    
    (2,620,496
    )Cash flow from financing activities:Distributions to Common Members
    
    
    (10,272,019
    )
    
    
    (9,183,059
    )Equity contributions from Common Members
    
    
    1,042,332
    
    
    
    5,356,916Net cash used in financing activities
    
    
    (9,229,687
    )
    
    
    (3,826,143
    )Net increase (decrease) in cash and cash equivalents
    
    
    (953,292
    )
    
    
    1,949,371Cash and
cash equivalents, beginning of period
    
    
    6,277,192
    
    
    
    2,670,417Cash and
cash equivalents, end of period
    
    $
    5,323,900
    
    
    $
    4,619,788
  37




---



##### 



BIGHORN GAS GATHERING, LLC
 Notes to Condensed Financial Statements
(Unaudited)
 (1)
    
    Organization and BusinessBighorn Gas Gathering, LLC (the Company) is a Delaware limited liability company. The Company
was formed in 1999, to construct and operate natural gas gathering lines and related
facilities in the Powder River Basin of Northern Wyoming. As of June 30, 2007 and December
31, 2006, and for the six months ended June 30, 2007 and 2006, the members common equity
interests were owned by the following:
 Cantera Gas Holdings, LLC (Cantera), a subsidiary of Cantera Natural Gas, LLC
    
    
    51
    %Crestone Energy Ventures, LLC (Crestone Energy)
    
    
    39
    %Crestone Gathering Services, LLC (Crestone Gathering)
    
    
    10
    %100
    %
 Contributions from the Companys common members may be required from time to time, and are
generally required from each member in proportion to their respective ownership percentage.
In addition, members may propose capital additions to the Companys gathering and
transportation system. In the event that all members do not consent, consenting members will
make capital contributions to the Company which will be used to fund the prospective capital
addition. Such contributions are immediately re-allocated to the equity accounts of each
member in proportion to their respective ownership interests. Consenting members are entitled
to a priority distribution of up to 140% of the amount of capital contributed by such
consenting members, as discussed below. Members liabilities are limited to the amount of
capital contributed.For the six months ended June 30, 2007, common members contributed $953,214, including
$246,785 from Cantera related to non-consent capital projects. The $246,785 of additional
capital contributed by Cantera was reallocated to common members, resulting in a $120,923
decrease in Canteras common member interest and a corresponding increase in the remaining
members interests.Priority distributions related to net recovery from non-consent capital projects are made in
priority to common distributions. Once 140% of the capital contributed by consenting members
has been distributed, net revenue from non-consent projects is distributable as common
distributions. Common member distributions are made for cash flows from the Companys
operations, as defined in the member agreement, in proportion to the common members respective
ownership interests. For the six months ended June 30, 2007, distributions to common members
totaled $10,354,250, including priority distributions to Cantera of $1,354,250.As noted above, net revenue from non-consent capital projects is attributable entirely to
consenting members up to 140% of the contributed capital. Remaining income is allocated to
common members in proportion to their respective ownership interests.The accompanying unaudited condensed financial statements have been prepared by the Company in
accordance with accounting principles generally accepted in the United States of America for
interim
 38




---



##### 



financial information and pursuant to the rules and regulations of the Security and
Exchange Commission (SEC). Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally accepted in
the United States of America have been condensed or omitted pursuant to SEC regulations. The
unaudited condensed financial statements reflect all adjustments and disclosures that are, in
the opinion of management, necessary for a fair presentation. All such adjustments are of a
normal recurring nature. These condensed financial statements should be read in conjunction
with the audited financial statements and the notes thereto for the year ended December 31,
2006. The condensed statements of operations and cash flows for the six months ended June 30,
2007 are not necessarily indicative of the results of operations or cash flows expected for
the full year.(2)
    
    Summary of Significant Accounting Policies
 (a)
    
    Use of EstimatesThe preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America, requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities, if any, at the date of the financial
statements, and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.(b)
    
    Gas Gathering OperationsThe Companys revenue is derived from fees collected for gathering and transporting
natural gas. Revenue is recognized once the Company can conclude it has evidence of an
arrangement, the fees are fixed or determinable, collectibility is probable and delivery
has occurred. The Company typically enters into long-term contracts that provide for
per unit gathering and transportation fees. Fees are determined on a monthly basis
based upon actual volumes and are recognized when the gas reaches the point of delivery.
The Company assesses collectibility at the inception of an arrangement based upon
credit ratings and prior collections history. In general, the Company conducts business
with customers with whom the Company has a long collection history. As a result, the
Company has not experienced significant credit losses, nor has its revenue recognition
been impacted due to assessments of collectibility. Costs are expensed as incurred.(c)
    
    Concentration of Credit RiskSubstantially all of the Companys accounts receivable at June 30, 2007 and December 31,
2006, result from gas-gathering and transporting fees earned from other companies in the
oil and gas industry. This concentration of customers may impact the Companys overall
credit risk, either positively or negatively, in that these entities may be similarly
affected by industry-wide changes in economic or other conditions. Such receivables are
generally not collateralized. However, the Company performs credit evaluations on all
its customers to minimize exposure to credit risk. During the six months ended June 30,
2007 and 2006, credit losses were not significant.A substantial majority of the Companys sales have historically been concentrated with
two customers. As of June 30, 2007, trade accounts receivable include receivables from
these customers representing 65.0% and 22.7% of total accounts receivable. As of December 31,
 39




---



##### 



2006, trade accounts receivable include receivables from these customers representing
67.9% and 18.2% of total accounts receivable.
 For the six months ended June 30, 2007, revenue includes sales to these customers
representing 68.8% and 22.3% of total revenue. For the six months ended June 30, 2006,
sales to these customers representing 68.7% and 22.8% of total revenue.(d)
    
    Income TaxesDue to the Companys limited liability status, the income tax consequences of the
Company pass through to the individual members. Accordingly, no provision has been made
for federal or state income taxes.In July 2006, the FASB issued Financial Accounting Standards Board Interpretation Number
48, Accounting for Uncertainty in Income Taxes(FIN 48), effective January 1, 2007. The
interpretation clarifies the accounting for uncertainty in income taxes recognized in a
companys financial statements in accordance with Statement of Financial Accounting
Standards Number 109, Accounting for Income Taxes. Specifically, the pronouncement
prescribes a more likely than not recognition threshold and a measurement attribute
for the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. The interpretation also provides guidance on the
related de-recognition, classification, interest and penalties, accounting for interim
periods, disclosure and transition of uncertain tax positions. The adoption of FIN 48
did not have a material effect on the Companys financial position or results of
operations.
 (3)
    
    Related-Party TransactionsThe Company makes cash calls from the members for monthly capital expenditures. As of June
30, 2007 and December 31, 2006, accounts receivable includes $160,533 and $249,651,
respectively, for outstanding cash calls from members.During the six months ended June 30, 2007 and 2006, gathering and transportation services
provided to Cantera accounted for approximately 2.8% and 3.2%, respectively, of the Companys
total revenue. As of June 30, 2007 and December 31, 2006, accounts receivable include $69,950
and $74,376, respectively, for these services.As of June 30, 2007 and December 31, 2006, distributions payable to members totaled $5,136,301
and $5,054,070, respectively, consisting of $636,301 and $554,070 of priority distributions,
respectively, and $4,500,000 and $4,500,000 of common distributions, respectively.The Company pays Cantera management fees related to the operation and administration of the
gathering system. For the six months ended June 30, 2007 and 2006, the Company incurred
management fees totaling $136,818 and $130,302, respectively, which are included in operating
and general and administrative expenses in the accompanying statements of operations. As of
June 30, 2007 and December 31, 2006, accounts payable to
Cantera consists of $55,272 and $47,161,
respectively, related to such services and reimbursements of expenses.
 40




---



##### 



(4)
    
    Commitments and ContingenciesFrom time to time, the Company is involved in legal administrative proceedings or claims,
which arise in the ordinary course of business. While such matters always contain an element
of uncertainty, management believes that matters of which they are aware will not individually
or in the aggregate have a material adverse effect on the Companys financial position or
results of operations.
 41




---



##### 



/s/ KPMG LLPDenver, ColoradoMarch 16, 2007
 42




---



##### 



BIGHORN GAS GATHERING, LLC
   2006
    
    
    2005AssetsCurrent assets:Cash and cash equivalents
    
    $
    6,277,192
    
    
    
    2,670,417Accounts receivable:Trade
    
    
    2,588,922
    
    
    
    2,270,205Cash calls from members
    
    
    249,651
    
    
    
    2,733,090Related parties
    
    
    74,376
    
    
    
    83,485Prepaid expenses
    
    
    131,200
    
    
    
    182,740Total current assets
    
    
    9,321,341
    
    
    
    7,939,937Property and equipment, net
    
    
    94,369,030
    
    
    
    94,018,413Other assets
    
    
    188,347
    
    
    
    Total assets
    
    $
    103,878,718
    
    
    
    101,958,350Liabilities and Members EquityCurrent liabilities:Accounts payable:Trade
    
    $
    579,706
    
    
    
    1,085,640Distributions payable to members
    
    
    5,054,070
    
    
    
    195,440Related parties
    
    
    47,161
    
    
    
    198,450Accrued liabilities
    
    
    164,603
    
    
    
    73,581Total current liabilities
    
    
    5,845,540
    
    
    
    1,553,111Commitments and contingencies (note 5)Members equity
    
    
    98,033,178
    
    
    
    100,405,239Total liabilities and members equity
    
    $
    103,878,718
    
    
    
    101,958,350
  43




---



##### 



BIGHORN GAS GATHERING, LLC
   2006
    
    
    2005
    
    
    2004Gathering fee revenue
    
    $
    25,859,596
    
    
    
    18,428,149
    
    
    
    15,628,747Expenses:Operating expenses
    
    
    6,897,288
    
    
    
    5,415,948
    
    
    
    5,335,984General and administrative
    
    
    580,294
    
    
    
    394,460
    
    
    
    312,653Settlement expense
    
    
    222,399
    
    
    
    
    
    
    
    Depreciation
    
    
    3,881,570
    
    
    
    3,679,660
    
    
    
    3,764,539Total expenses
    
    
    11,581,551
    
    
    
    9,490,068
    
    
    
    9,413,176Operating income
    
    
    14,278,045
    
    
    
    8,938,081
    
    
    
    6,215,571Other income:Gathering contract settlement income
    
    
    1,540,000
    
    
    
    
    
    
    
    Interest income
    
    
    185,916
    
    
    
    86,730
    
    
    
    Other income
    
    
    14,377
    
    
    
    35,942
    
    
    
    52,352Total other income
    
    
    1,740,293
    
    
    
    122,672
    
    
    
    52,352Net income
    
    $
    16,018,338
    
    
    
    9,060,753
    
    
    
    6,267,923
  44




---



##### 



BIGHORN GAS GATHERING, LLC
   Preferred member interests
    
    
    Common member interestsCrestone
    
    
    CrestonePreferred A
    
    
    Preferred B
    
    
    Cantera
    
    
    Energy
    
    
    Gatheringmember
    
    
    member
    
    
    Gas Co,
    
    
    Ventures,
    
    
    Services,interests
    
    
    interests
    
    
    Inc.
    
    
    L.L.C.
    
    
    L.L.C.
    
    
    TotalBalance at January 1, 2004
    
    $
    1,000,000
    
    
    
    1,000,000
    
    
    
    43,265,852
    
    
    
    33,085,649
    
    
    
    8,483,500
    
    
    
    86,835,001Contributions
    
    
    
    
    
    
    
    
    
    
    3,330,440
    
    
    
    946,024
    
    
    
    242,570
    
    
    
    4,519,034Allocation of 2004 contributions
    
    
    
    
    
    
    
    
    
    
    (1,025,733
    )
    
    
    816,399
    
    
    
    209,334
    
    
    
    Distributions
    
    
    (2,540,763
    )
    
    
    
    
    
    
    (1,301,408
    )
    
    
    (784,292
    )
    
    
    (201,100
    )
    
    
    (4,827,563
    )Net income
    
    
    2,540,763
    
    
    
    
    
    
    
    2,035,991
    
    
    
    1,346,032
    
    
    
    345,137
    
    
    
    6,267,923Balance at December 31, 2004
    
    
    1,000,000
    
    
    
    1,000,000
    
    
    
    46,305,142
    
    
    
    35,409,812
    
    
    
    9,079,441
    
    
    
    92,794,395Contributions
    
    
    
    
    
    
    
    
    
    
    11,747,374
    
    
    
    1,636,262
    
    
    
    419,554
    
    
    
    13,803,190Allocation of 2005 contributions
    
    
    
    
    
    
    
    
    
    
    (4,707,744
    )
    
    
    3,327,427
    
    
    
    1,380,317
    
    
    
    Retirement of preferred interests
    
    
    (1,000,000
    )
    
    
    (1,000,000
    )
    
    
    1,020,000
    
    
    
    780,000
    
    
    
    200,000
    
    
    
    Distributions
    
    
    (4,104,211
    )
    
    
    
    
    
    
    (6,542,888
    )
    
    
    (3,666,000
    )
    
    
    (940,000
    )
    
    
    (15,253,099
    )Net income
    
    
    4,104,211
    
    
    
    
    
    
    
    3,384,792
    
    
    
    1,250,985
    
    
    
    320,765
    
    
    
    9,060,753Balance at December 31, 2005
    
    
    
    
    
    
    
    
    
    
    51,206,676
    
    
    
    38,738,486
    
    
    
    10,460,077
    
    
    
    100,405,239Reallocation of beginning members interests
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    419,558
    
    
    
    (419,558
    )
    
    
    Contributions
    
    
    
    
    
    
    
    
    
    
    4,254,149
    
    
    
    645,768
    
    
    
    165,583
    
    
    
    5,065,500Allocation of 2006 contributions
    
    
    
    
    
    
    
    
    
    
    (1,670,743
    )
    
    
    1,329,776
    
    
    
    340,967
    
    
    
    Distributions
    
    
    
    
    
    
    
    
    
    
    (13,609,144
    )
    
    
    (7,837,213
    )
    
    
    (2,009,542
    )
    
    
    (23,455,899
    )Net income
    
    
    
    
    
    
    
    
    
    
    9,815,983
    
    
    
    4,936,564
    
    
    
    1,265,791
    
    
    
    16,018,338Balance at December 31, 2006
    
    $
    
    
    
    
    
    
    
    
    49,996,921
    
    
    
    38,232,939
    
    
    
    9,803,318
    
    
    
    98,033,178
  45




---



##### 



BIGHORN GAS GATHERING, LLC
   2006
    
    
    2005
    
    
    2004Cash flow from operating activities:Net income
    
    $
    16,018,338
    
    
    
    9,060,753
    
    
    
    6,267,923Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation
    
    
    3,881,570
    
    
    
    3,679,660
    
    
    
    3,764,539Gain on disposal of property and equipment
    
    
    (4,000
    )
    
    
    (36,514
    )
    
    
    (24,763
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    (309,608
    )
    
    
    (827,426
    )
    
    
    (1,351,956
    )Prepaid and other
    
    
    60,801
    
    
    
    95,949
    
    
    
    (315,962
    )Accounts payable
    
    
    (657,223
    )
    
    
    773,204
    
    
    
    145,613Accrued liabilities
    
    
    91,022
    
    
    
    (712,981
    )
    
    
    543,539Net cash provided by operating activities
    
    
    19,080,900
    
    
    
    12,032,645
    
    
    
    9,028,933Cash flow from investing activities:Capital expenditures
    
    
    (4,232,187
    )
    
    
    (10,348,240
    )
    
    
    (5,874,700
    )Other assets
    
    
    (197,608
    )
    
    
    
    
    
    
    Proceeds from disposal of property and equipment
    
    
    4,000
    
    
    
    233,463
    
    
    
    24,763Net cash used in investing activities
    
    
    (4,425,795
    )
    
    
    (10,114,777
    )
    
    
    (5,849,937)Cash flow from financing activities:Distributions to preferred members
    
    
    
    
    
    
    (4,104,211
    )
    
    
    (3,922,733)Distributions to common members
    
    
    (18,597,269
    )
    
    
    (10,953,448
    )
    
    
    (5,473,674)Equity contributions from common members
    
    
    7,548,939
    
    
    
    13,325,394
    
    
    
    4,519,034Net cash used in financing activities
    
    
    (11,048,330
    )
    
    
    (1,732,265
    )
    
    
    (4,877,373)Net increase (decrease) in cash and cash
equivalents
    
    
    3,606,775
    
    
    
    185,603
    
    
    
    (1,698,377)Cash and cash equivalents, beginning of year
    
    
    2,670,417
    
    
    
    2,484,814
    
    
    
    4,183,191Cash and cash equivalents, end of year
    
    $
    6,277,192
    
    
    
    2,670,417
    
    
    
    2,484,814
  46




---



##### 



BIGHORN GAS GATHERING, LLC
   (1)
    
    Organization and BusinessBighorn Gas Gathering, LLC (the Company) is a Delaware limited liability company. The Company
was formed in 1999 to construct and operate natural gas gathering lines and related facilities
in the Powder River Basin of Northern Wyoming. As of December 31, 2006, and for the years
ended December 31, 2006, 2005, and 2004, the members common equity interests were owned by
the following:
 Cantera Gas Holdings, LLC (Cantera),
a subsidiary of Cantera
Natural Gas, LLC
    
    
    51
    %Crestone Energy Ventures, LLC
(Crestone Energy)
    
    
    39Crestone Gathering Services, LLC
(Crestone Gathering)
    
    
    10100
    %
       47




---



##### 



BIGHORN GAS GATHERING, LLC
       (2)
    
    Summary of Significant Accounting Policies
 (a)
    
    Use of EstimatesThe preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities, if any, at the date of the financial
statements, and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.(b)
    
    Gas Gathering OperationsThe Companys revenue is derived from fees collected for gathering and transporting
natural gas. Revenue is recognized once the Company can conclude it has evidence of an
arrangement, the fees are fixed or determinable, collectibility is probable, and delivery
has occurred. The Company typically enters into long-term contracts that provide for per
unit gathering and transportation fees. Fees are determined on a monthly basis based upon
actual volumes and are recognized when the gas reaches the point of delivery. The Company
assesses collectibility at the inception of an arrangement based upon credit ratings and
prior collections history. In general, the Company conducts business with customers with
whom the Company has a long collection history. As a result, the Company has not
experienced significant credit losses, nor has its revenue recognition been impacted due
to assessments of collectibility. Costs are expensed as incurred.(c)
    
    Cash and Cash EquivalentsThe Company considers all highly liquid cash investments with original maturities of
three months or less when purchased to be cash equivalents.
  48




---



##### 



BIGHORN GAS GATHERING, LLC
   (d)
    
    ImbalancesImbalances result when the Companys customers either over-or under-deliver natural gas
to the Companys system. In general, over-or under-delivery into the Companys system is
offset by the Companys equivalent over-or under-delivery at the delivery points into the
Ft. Union Gathering System, an affiliate of Cantera. Accordingly, at December 31, 2006
and 2005, the Company had no gas imbalances.(e)
    
    Property and EquipmentProperty and equipment are recorded at cost. Maintenance and repairs are charged to
expense as incurred. Expenditures that extend the useful lives of assets are capitalized.
When assets are retired or otherwise disposed of, the costs of the assets and the related
accumulated depreciation are removed from the accounts. Any gain or loss on retirements
or dispositions is reflected in other income in the year in which the asset is disposed.
Depreciation is provided on a straight-line basis over the estimated useful life for each
asset. Effective January 1, 2005, the Company revised the estimated useful lives of
certain equipment from 20 years to 30 years. As a result of the change in estimated
lives, during the year ended December 31, 2005, the Company recorded $340,000 less
depreciation expense than would have been recorded if the lives had not been revised.
Property and equipment consists of the following:
 December 31Useful lives

    
    2006
    
    
    2005Vehicles
    
    3 years
    
    
    $
    874,700
    
    
    
    740,250Computer and communication
equipment
    
    5 years
    
    
    
    483,338
    
    
    
    483,338Pipeline materials
    
    
    N/A
    
    
    
    26,244
    
    
    
    228,726Gathering lines and related equipment
    
    30 years
    
    
    
    113,780,503
    
    
    
    109,480,284115,164,785
    
    
    
    110,932,598Less accumulated depreciation
    
    
    
    
    
    
    (20,795,755
    )
    
    
    (16,914,185
    )Net property and
equipment
    
    
    
    
    
    $
    94,369,030
    
    
    
    94,018,413
 (f)
    
    Asset ImpairmentThe Company evaluates its long-lived assets to be held and used for impairment whenever
events or circumstances indicate the carrying value may not be recoverable. An impairment
loss is recorded for assets to be held and used when the carrying amount is not
recoverable from future estimated undiscounted cash flows and exceeds the fair value.
Assets classified as held-for-sale are recorded at
the lower of the carrying amount or fair value less cost to sell. During the years ended
December 31, 2006, 2005, and 2004, no impairments of the Companys long-lived assets were
recorded.
  49




---



##### 



BIGHORN GAS GATHERING, LLC
   (g)
    
    Fair Value of Financial InstrumentsThe Companys financial instruments consist of cash, accounts receivable, accounts
payable, and other current liabilities. The carrying amounts of financial instruments
approximate fair value due to their short maturities.(h)
    
    Concentration of Credit RiskSubstantially all of the Companys accounts receivable at December 31, 2006 and 2005
result from gas-gathering and transporting fees earned from other companies in the oil
and gas industry. This concentration of customers may impact the Companys overall credit
risk, either positively or negatively, in that these entities may be similarly affected
by industry-wide changes in economic or other conditions. Such receivables are generally
not collateralized. However, the Company performs credit evaluations on all its customers
to minimize exposure to credit risk. During the years ended December 31, 2006, 2005, and
2004, credit losses were not significant.As of December 31, 2006, trade accounts receivable include receivables from two customers
representing 67.9% and 18.2% of total accounts receivable. As of December 31, 2005, trade
accounts receivable include receivables from three customers representing 39.5%, 26.8%,
and 14.2% of total accounts receivable.For the year ended December 31, 2006, revenue includes sales to two customers
representing 69.4% and 22.3% of total revenue. For the year ended December 31, 2005,
sales to two customers represented 60.1% and 28.1% of total revenue. For the year ended
December 31, 2004, sales to two customers represented 57.7% and 28.2% of total revenue.(i)
    
    Income TaxesDue to the Companys limited liability status, the income tax consequences of the Company
pass through to the individual members. Accordingly, no provision has been made for
federal or state income taxes.(j)
    
    ReclassificationsCertain reclassifications have been made to the 2004 and 2005 statements to conform to
the 2006 presentation.
  50




---



##### 



BIGHORN GAS GATHERING, LLC
   (3)
    
    Operating LeasesThe Company leases certain equipment for use on its gathering system under month-to-month and
long term operating leases. The following is a schedule of future minimum rental payments
required under operating leases as of December 31, 2006. At the end of the current lease
terms, substantially all leases convert to month-to-month leases.
 Year ending December 31:2007
    
    $
    653,2322008
    
    
    15,300$
    668,532
 For the years ended December 31, 2006, 2005, and 2004, rent expense totaled $1,837,005,
$1,355,581, and $1,744,000, respectively.(4)
    
    Related-Party TransactionsThe Company makes cash calls from the members for monthly capital expenditures. As of
December 31, 2006 and 2005, accounts receivable includes $249,651 and $2,733,090,
respectively, for outstanding cash calls from members.During the years ended December 31, 2006, 2005, and 2004, gathering and transportation
services provided to Cantera accounted for approximately 3%, 5%, and 3%, respectively, of the
Companys total revenue. As of December 31, 2006 and 2005, accounts receivable include $74,376
and $83,485, respectively, for these services.As of December 31, 2006 and 2005, distributions payable to members totaled $5,054,070 and
$195,440, respectively, consisting of $554,070 and $195,440 of priority distributions,
respectively, and $4,500,000 and $0 of common distributions, respectively.The Company pays Cantera management fees related to the operation and administration of the
gathering system. For the years ended December 31, 2006, 2005, and 2004, the Company reflected
in operating expenses and general and administrative management fees totaling $549,707,
$396,200, and $385,320, respectively.As of December 31, 2006 and 2005, the Company had accounts payable to Cantera of $47,161 and
$198,450, respectively. Of the amount due Cantera, $47,161 and $50,146, respectively, related
to services and reimbursements of expenses. The remainder of the December 31, 2005 balance of
$148,304 includes amounts due to members for imbalance cash-outs.
  51




---



##### 



BIGHORN GAS GATHERING, LLC
   (5)
    
    Commitments and ContingenciesFrom time to time, the Company is involved in legal administrative proceedings or claims,
which arise in the ordinary course of business. While such matters always contain an element
of uncertainty, management believes that matters of which they are aware will not individually
or in the aggregate have a material adverse effect on the Companys financial position or
results of operations.On August 22, 2006, the Company settled a lawsuit with First Source/Western Gas Resources. As
a result of the settlement, First Source paid the Company $1,540,000 in cash to obtain a
release of any and all counterclaims the Company had against First Source and to obtain
cancellation of the Gas Gathering Agreement, dated as of September 1, 2000, between First
Source and the Company. The gathering contract settlement income is reflected in other income
in the Companys statements of operations for the year ended December 31, 2006. First Sources
lands formerly dedicated to the Company and acquired by a third party were rededicated to the
Company. During the course of the settlement, the Company incurred $222,399 of legal fees.
 52




---



##### 



FORT
UNION GAS GATHERING, LLC
 
 June 30, 2007
    
    
    December 31, 2006AssetsCurrent assets:Cash and cash equivalents
    
    $
    10,406,687
    
    
    $
    8,358,149Accounts receivable:Trade
    
    
    201,443
    
    
    
    120,471Due from related parties
    
    
    1,365,393
    
    
    
    3,274,456Prepaid expenses and other
    
    
    211,698
    
    
    
    66,961Total current assets
    
    
    12,185,221
    
    
    
    11,820,037Property and equipment, net
    
    
    89,691,865
    
    
    
    50,886,824Deferred financing costs, net of accumulated amortization
of $1,598,107 and $1,469,460 for 2007 and 2006,
respectively
    
    
    1,545,194
    
    
    
    610,009Total assets
    
    $
    103,422,280
    
    
    $
    63,316,870Liabilities and Members EquityCurrent liabilities:Current portion of long-term debt
    
    $
    7,807,636
    
    
    $
    7,533,636Accounts payable:Trade
    
    
    408,378
    
    
    
    1,706,768Due to related parties
    
    
    38,576,146
    
    
    
    7,013Distributions payable to members
    
    
    5,000,000
    
    
    
    4,000,000Accrued liabilities
    
    
    3,461,464
    
    
    
    3,020,136Total current liabilities
    
    
    55,253,624
    
    
    
    16,267,553Long-term debt, net of current portion
    
    
    11,655,571
    
    
    
    14,633,174Interest rate swap agreements
    
    
    130,365
    
    
    
    232,381Total liabilities
    
    
    67,039,560
    
    
    
    31,133,108Commitments and contingencies (note 6)Members equity
    
    
    36,382,720
    
    
    
    32,183,762Total liabilities and members equity
    
    $
    103,422,280
    
    
    $
    63,316,870
  53




---



##### 



FORT UNION GAS GATHERING, LLC
 
 For the Six Months Ended June 30,2007
    
    
    2006Gathering fee revenue
    
    $
    16,873,551
    
    
    $
    15,011,420Costs and expenses:Operating
    
    
    1,103,851
    
    
    
    850,374General and administrative
    
    
    274,081
    
    
    
    296,885Depreciation
    
    
    1,048,786
    
    
    
    999,561Total costs and expenses
    
    
    2,426,718
    
    
    
    2,146,820Operating income
    
    
    14,446,833
    
    
    
    12,864,600Other income (expense):Interest income
    
    
    96,503
    
    
    
    62,186Interest expense
    
    
    (844,528
    )
    
    
    (758,714
    )Other income
    
    
    150
    
    
    
    Total other income (expense)
    
    
    (747,875
    )
    
    
    (696,528
    )Net income
    
    $
    13,698,958
    
    
    $
    12,168,072
  54




---



##### 



FORT UNION GAS GATHERING, LLC
  
 Member InterestsCrestoneCantera
    
    
    Powder
    
    
    Western GasGas Holdings,
    
    
    River,
    
    
    Resources,L.L.C.
    
    
    L.L.C.
    
    
    L.L.C.
    
    
    Bargath, Inc.
    
    
    TotalBalance at January 1, 2007
    
    $
    11,920,865
    
    
    $
    11,920,865
    
    
    $
    4,766,416
    
    
    $
    3,575,616
    
    
    $
    32,183,762Distributions
    
    
    (3,518,800
    )
    
    
    (3,518,800
    )
    
    
    (1,406,950
    )
    
    
    (1,055,450
    )
    
    
    (9,500,000
    )Net income
    
    
    5,074,094
    
    
    
    5,074,094
    
    
    
    2,028,816
    
    
    
    1,521,954
    
    
    
    13,698,958Balance at June 30, 2007
    
    $
    13,476,159
    
    
    $
    13,476,159
    
    
    $
    5,388,282
    
    
    $
    4,042,120
    
    
    $
    36,382,720
  55




---



##### 



FORT UNION GAS GATHERING, LLC
 
 For the Six Months Ended June 30,2007
    
    
    2006Cash flow from operating activities:Net income
    
    $
    13,698,958
    
    
    $
    12,168,072Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation
    
    
    1,048,786
    
    
    
    999,561Amortization
    
    
    128,647
    
    
    
    110,910Net unrealized (gain) loss on interest rate swaps
    
    
    (102,016
    )
    
    
    (401,479
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    1,828,091
    
    
    
    (456,224
    )Prepaid expenses
    
    
    (144,737
    )
    
    
    (105,282
    )Accounts payable
    
    
    (904,377
    )
    
    
    (155,047
    )Accrued liabilities
    
    
    441,328
    
    
    
    2,226,669Net cash provided by operating activities
    
    
    15,994,680
    
    
    
    14,387,180Cash flow from investing activities:Capital expenditures
    
    
    (1,678,707
    )
    
    
    (1,120,000
    )Net cash used in investing activities
    
    
    (1,678,707
    )
    
    
    (1,120,000
    )Cash flow from financing activities:Distributions to Common Members
    
    
    (8,500,000
    )
    
    
    (8,800,000
    )Proceeds from long-term debt
    
    
    1,000,000
    
    
    
    Payments on long-term debt
    
    
    (3,703,603
    )
    
    
    (3,434,360
    )Deferred financing costs
    
    
    (1,063,832
    )
    
    
    Net cash used in financing activities
    
    
    (12,267,435
    )
    
    
    (12,234,360
    )Net increase in cash and cash equivalents
    
    
    2,048,538
    
    
    
    1,032,820Cash and
cash equivalents, beginning of period
    
    
    8,358,149
    
    
    
    7,811,232Cash and
cash equivalents, end of period
    
    $
    10,406,687
    
    
    $
    8,844,052Supplemental disclosures of cash flow information:Cash paid during the year for interest
    
    $
    817,897
    
    
    $
    1,049,283Capital expenditures funded by members
    
    $
    38,175,720
    
    
    $
    
  56




---



##### 



FORT UNION GAS GATHERING, LLC
 Notes to Condensed Financial Statements
(Unaudited)
 (1)
    
    Organization and BusinessFort Union Gas Gathering, LLC (the Company) is a Delaware limited liability company. The
Company was formed in 1999, to construct and operate a natural gas gathering line in the
Powder River Basin of northern Wyoming.The members and common member interests of the Company at June 30, 2007 and December 31,
2006, and for the six months ended June 30, 2007 and 2006, are as follows:
 Cantera Gas Holdings, L.L.C. (Cantera), a subsidiary of
Cantera Natural Gas, LLC
    
    
    37.04
    %Crestone Powder River, L.L.C. (Crestone)
    
    
    37.04
    %Western Gas Wyoming, L.L.C. (Western)
    
    
    14.81
    %Bargath, Inc. (Bargath)
    
    
    11.11
    %100.00
    %
 Pursuant to the operating agreement among the members, profits and losses are allocated among
the common member interests in proportion to their respective equity interest. Distributions
are made to members as defined in the operating agreement based on the above equity
interests. Members liabilities are limited to the amount of capital contributed.The accompanying unaudited condensed financial statements have been prepared by the Company
in accordance with accounting principles generally accepted in the United States of America
for interim financial information and pursuant to the rules and regulations of the Security
and Exchange Commission (SEC). Certain information and footnote disclosures normally included
in financial statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to SEC regulations.
The unaudited condensed financial statements reflect all adjustments and disclosures that
are, in the opinion of management, necessary for a fair presentation. All such adjustments
are of a normal recurring nature. These condensed financial statements should be read in
conjunction with the audited financial statements and the notes thereto for the year ended
December 31, 2006. The condensed statements of operations and cash flows for the six months
ended June 30, 2007 are not necessarily indicative of the results of operations or cash flows
expected for the full year.(2)
    
    Summary of Significant Accounting Policies
 (a)
    
    Use of EstimatesThe preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America, requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities, if any, at the date of the financial
statements, and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
 57




---



##### 



(b)
    
    Gas Gathering OperationsThe Companys revenue is derived from fees collected for transporting natural gas.
Revenue is recognized once the Company can conclude it has evidence of an arrangement,
the fees are fixed or determinable, collectibility is probable and delivery has occurred.
The Company typically enters into long-term contracts that provide for per unit
transportation fees. Fees are determined on a monthly basis based upon actual delivered
volumes. The Company assesses collectibility at the inception of an arrangement based
upon credit ratings and prior collections history. In general, the Company conducts
business with a static customer base with whom the Company has a long collection history.
As a result, the Company has not experienced significant credit losses, nor has its
revenue recognition been impacted due to assessments of collectibility. Costs are
expensed as incurred.(c)
    
    FuelThe Company is entitled to recoup fuel costs from shippers based upon actual fuel used in
operations. The Company collects fuel charges based upon estimated fuel costs, which are
adjusted periodically to account for differences between estimated fuel charges and
actual fuel used. Any accumulated differences are recorded as an asset or liability to
the shippers. The Company records receivables and payables based upon the fair market
price of fuel in the month in which the differences were generated. As the fuel rates
are adjusted to account for historical differences, the Company reduces the receivable or
payable at the current month average price. As of June 30, 2007 and December 31, 2006,
the Company had net fuel payables of approximately $3,195,197 and $3,010,483,
respectively, that are reflected in the accompanying balance sheets as accrued
liabilities.(d)
    
    Concentration of Credit RiskSubstantially all of the Companys accounts receivable at June 30, 2007 and December 31,
2006, result from the transportation of gas earned from other companies in the oil and
gas industry. This concentration of customers may impact the Companys overall credit
risk, either positively or negatively, in that these entities may be similarly affected
by industry-wide changes in economic or other conditions. Such receivables are generally
not collateralized.As of June 30, 2007, trade accounts receivable include receivables from four members (or
their affiliates) representing 31.6%, 23.8%, 15.8% and 15.4% of total accounts
receivable. As of December 31, 2006, trade accounts receivable include receivables from
three members (or their affiliates) representing 40.1%, 25.7% and 23.9% of total accounts
receivable. Substantially all of the Companys revenues are from the Companys members
or their affiliates. The portion of gathering fee revenue attributable to the members or
their affiliates was as follows:
 For the Six Months Ended June 30,2007
    
    
    2006Cantera
    
    
    22.6
    %
    
    
    18.3
    %Crestone
    
    
    22.9
    %
    
    
    26.0
    %Western
    
    
    29.0
    %
    
    
    33.4
    %Bargath
    
    
    24.0
    %
    
    
    20.5
    %Total
    
    
    98.5
    %
    
    
    98.2
    %
 58




---



##### 



(e)
    
    Income Taxes
 Due to the Companys limited liability status, the tax consequences of the Company pass
through to the individual members. Accordingly, no provision has been made for federal,
state, or local taxes.The Company adopted Financial Accounting Standards Board Interpretation Number 48,
Accounting for Uncertainty in Income Taxes(FIN 48), effective January 1, 2007. The
interpretation clarifies the accounting for uncertainty in income taxes recognized in a
companys financial statements in accordance with Statement of Financial Accounting
Standards Number 109, Accounting for Income Taxes. Specifically, the pronouncement
prescribes a more likely than not recognition threshold and a measurement attribute for
the financial statement recognition and measurement of a tax position taken or expected
to be taken in a tax return. The interpretation also provides guidance on the related
de-recognition, classification, interest and penalties, accounting for interim periods,
disclosure and transition of uncertain tax positions. The adoption of FIN 48 did not
have a material effect on the Companys financial position or results of operations.
 (3)
    
    Interest Rate SwapsAs of June 30, 2007 and December 31, 2006, the Company had interest rate swap agreements for
$14,588,327 and $17,517,696, respectively, of debt. The Company is the fixed rate payor in
these agreements at fixed rates ranging from 5.98% to 5.99%. The interest rate swaps reprice
concurrent with the repricing of the related debt, thus the variable rate portion of the swap
agreements will always equal the base rate in the debt agreement. The purpose of these swap
agreements is to hedge the interest rate risk associated with the variable interest rate of
the outstanding debt. The counter parties to these swap agreements are the same banks who
hold the notes payable described in Note 4. These swap agreements have identical maturity,
amortization of loan balance, and floating interest rates as the notes payable.The fair value of these interest rate swaps is determined based on the amount at which the
fixed interest rate differs from the quoted market rate. As of June 30, 2007 and December
31, 2006, the fair value of these interest rate swaps was a liability of $130,365 and
$232,381, respectively. Changes in the fair value of the interest rate swaps are recorded as
adjustments to interest expense. During the six months ended June 30, 2007 and 2006, the
Company paid settlements of $53,466 and $140,322, respectively, under these swap agreements,
which were recorded as interest expense.(4)
    
    DebtOn April 30, 2007, the Company refinanced its existing $20,000,000 credit facility to include
an additional $115,000,000 revolving line of credit that converts to a term loan. In
addition, certain terms of the existing borrowings were modified. However, the refinancing
did not result in a significant modification to the outstanding debt and therefore no gain or
loss was recognized. In connection with the refinancing, the Company incurred $1,063,832 of
costs that have been capitalized and are being amortized as additional interest expense over
the term of the debt. Long-term debt consists of the following:
 59




---



##### 



June 30,
    
    
    December 31,2007
    
    
    2006Note payable to banks: due September 30, 2009; secured by
all of the fixed assets of the Company; escalating principal
payments and interest are due quarterly; commencing April 30,
2007, interest payable at LIBOR plus 1.5%; previously payable at
LIBOR plus an escalating margin as set forth in the debt
agreement (6.80% at June 30, 2007)
    
    $
    11,671,674
    
    
    $
    14,020,101Note payable to banks; due September 30, 2009; secured by
all of the fixed assets of the Company; escalating principal
payments and interest are due quarterly; commencing April 30,
2007, interest payable at LIBOR plus 1.5%; previously payable at
LIBOR plus an escalating margin as set forth in the debt
agreement (6.80% at June 30, 2007)
    
    
    6,791,533
    
    
    
    8,146,709Note payable to banks; due April 30, 2013; secured by
all of the fixed assets of the Company; interest-only payments
due quarterly on revolving line of credit that converts to a term
loan on July 31, 2008; thereafter, escalating principal payments
and interest are due quarterly; interest payable at Prime plus .5%
(8.75% at June 30, 2007)
    
    
    1,000,000
    
    
    
    19,463,207
    
    
    
    22,166,810Less current portion
    
    
    7,807,636
    
    
    
    7,533,636Long-term debt
    
    $
    11,655,571
    
    
    $
    14,633,174
 Among other covenants and restrictions, the Company must maintain a certain debt service
ratio and must submit written notice to the banks for distributions to members and
reimbursement of administrative and management fees.(5)
    
    Transactions With Affiliated/Related PartiesThe Company purchases certain services from Western and Cantera. These services include
management and administrative services related to the operations of the gathering system.
For the six months ended June 30, 2007 and 2006, reflected in operating and general and
administrative expenses are amounts incurred by the Company, including
$373,635 and $346,695, respectively, for reimbursement of actual expenses paid by Western,
and approximately $43,056 and $42,078, respectively, for reimbursement of actual expenses
paid by Cantera. Accounts payable as of June 30, 2007 and December 31, 2006 included
$400,426 and $7,013, respectively, for amounts due for such services.As of June 30, 2007, accounts payable to related parties also included $38,175,720 due to
members for capital expenditures paid by members on behalf of the Company related to the
Companys pipeline expansion. The Company has accrued $5,000,000 and $4,000,000,
respectively, for distributions due to Common Members as of June 30, 2007 and December 31,
2006.As of June 30, 2007 and December 31, 2006, accounts
 60




---



##### 



receivable from related parties includes $1,365,393 and
$3,274,456, respectively, receivable from these members.(6)
    
    Commitments and ContingenciesFrom time to time, the Company is involved in legal administrative proceedings or claims,
which arise in the ordinary course of its business. While such matters always contain an
element of uncertainty, management believes that matters of which they are aware will not
individually or in the aggregate have a material adverse effect on the Companys financial
position or results of operations.
 61




---



##### 



Report of Independent Registered Public Accounting Firm
 
    /s/ KPMG LLPDenver, ColoradoMarch 16, 2007
 62




---



##### 



FORT UNION GAS GATHERING, LLC
   AssetsCurrent assets:Cash and cash equivalents
    
    $
    8,358,149Accounts receivable:Trade
    
    
    120,471Due from related parties
    
    
    3,274,456Prepaid expenses and other
    
    
    66,961Total current assets
    
    
    11,820,037Property and equipment, net
    
    
    50,886,824Deferred financing costs, net of accumulated amortization of $1,469,460
    
    
    610,009Total assets
    
    $
    63,316,870Liabilities and Members EquityCurrent liabilities:Current portion of long-term debt
    
    $
    7,533,636Accounts payable:Trade
    
    
    1,706,768Due to related parties
    
    
    7,013Distributions payable to Members
    
    
    4,000,000Accrued liabilities
    
    
    3,020,136Total current liabilities
    
    
    16,267,553Long-term debt, net of current portion
    
    
    14,633,174Interest rate swap agreements
    
    
    232,381Total liabilities
    
    
    31,133,108Commitments and contingencies (note 6)Members equity
    
    
    32,183,762Total liabilities and members equity
    
    $
    63,316,870
  63




---



##### 



FORT UNION GAS GATHERING, LLC
   Gathering fee revenue
    
    $
    30,987,817Costs and expenses:Operating
    
    
    1,679,637General and administrative
    
    
    530,387Depreciation
    
    
    2,000,306Total costs and expenses
    
    
    4,210,330Operating income
    
    
    26,777,487Other income (expenses):Interest income
    
    
    166,907Interest expense
    
    
    (1,880,813
    )Other income
    
    
    10,522(1,703,384
    )Net income
    
    $
    25,074,103
  64




---



##### 



FORT UNION GAS GATHERING, LLC
   Member interestsCrestoneCantera
    
    
    Cantera
    
    
    Powder
    
    
    Western GasGas Holdings,
    
    
    Natural Gas,
    
    
    River,
    
    
    Resources,L.L.C.
    
    
    L.L.C.
    
    
    L.L.C.
    
    
    L.L.C.
    
    
    Bargath, Inc.
    
    
    TotalBalance at January 1, 2006
    
    $
    9,117,777
    
    
    
    108,202
    
    
    
    9,225,978
    
    
    
    3,689,724
    
    
    
    2,767,978
    
    
    
    24,909,659Transfer CNG interest to Cantera Gas Holdings
    
    
    300,613
    
    
    
    (300,613
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Distributions
    
    
    (6,415,040
    )
    
    
    (178,080
    )
    
    
    (6,593,120
    )
    
    
    (2,636,180
    )
    
    
    (1,977,580
    )
    
    
    (17,800,000
    )Net income
    
    
    8,917,515
    
    
    
    370,491
    
    
    
    9,288,007
    
    
    
    3,712,872
    
    
    
    2,785,218
    
    
    
    25,074,103Balance at December 31, 2006
    
    $
    11,920,865
    
    
    
    
    
    
    
    11,920,865
    
    
    
    4,766,416
    
    
    
    3,575,616
    
    
    
    32,183,762
  65




---



##### 



FORT UNION GAS GATHERING, LLC
   Cash flow from operating activities:Net income
    
    $
    25,074,103Adjustments to reconcile net income to net cash provided by operating activities:Depreciation
    
    
    2,000,306Amortization
    
    
    221,820Net unrealized gain on interest rate swaps
    
    
    (334,815
    )Changes in operating assets and liabilities:Accounts receivable
    
    
    (859,607
    )Prepaid expenses
    
    
    (24,928
    )Accounts payable
    
    
    373,370Accrued liabilities
    
    
    1,375,342Net cash provided by operating activities
    
    
    27,825,591Cash flow from investing activities:Capital expenditures
    
    
    (2,980,778
    )Net cash used in investing activities
    
    
    (2,980,778
    )Cash flow from financing activities:Distributions to Common Members
    
    
    (17,311,000
    )Payments on long-term debt
    
    
    (6,986,896
    )Net cash used in financing activities
    
    
    (24,297,896
    )Net increase in cash and cash equivalents
    
    
    546,917Cash and cash equivalents, beginning of year
    
    
    7,811,232Cash and cash equivalents, end of year
    
    $
    8,358,149Supplemental disclosure of cash flow information:Cash paid during the year for interest
    
    $
    1,993,808
  66




---



##### 



FORT UNION GAS GATHERING, LLC
   (1)
    
    Organization and BusinessFort Union Gas Gathering, LLC (the Company) is a Delaware limited liability company. The
Company was formed in 1999, to construct and operate a natural gas gathering line in the Powder
River Basin of northern Wyoming.The members and common member interests of the Company at December 31, 2006 are as follows:
 Cantera Gas Holdings, L.L.C. (Cantera), a subsidiary of
Cantera Natural Gas, LLC
    
    
    37.04
    %Crestone Powder River L.L.C. (Crestone)
    
    
    37.04Western Gas Resources, L.L.C. (Western)
    
    
    14.81Bargath, Inc. (Bargath)
    
    
    11.11100.00
    %
 Pursuant to the operating agreement among the members, profits and losses are allocated among
the common member interests in proportion to their respective equity interest. Distributions
are made to members as defined in the operating agreement based on the above equity interest.
Members liabilities are limited to the amount of capital contributed.(2)
    
    Summary of Significant Accounting Policies
 (a)
    
    Use of EstimatesThe preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities, if any, at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting period. Actual results could
differ from those estimates.(b)
    
    Gas Gathering OperationsThe Companys revenue is derived from fees collected for transporting natural gas. Revenue
is recognized once the Company can conclude it has evidence of an arrangement, the fees are
fixed or determinable, collectibility is probable and delivery has occurred. The Company
typically enters into long-term contracts that provide for per unit transportation fees.
Fees are determined on a monthly basis based upon actual volumes. The Company assesses
collectibility at the inception of an arrangement based upon credit ratings and prior
collections history. In general, the Company conducts business with a static customer base
with whom the Company has a long collection history. As a result, the Company has not
experienced significant credit losses, nor has its revenue recognition been impacted due to
assessments of collectibility. Costs are expensed as incurred.(c)
    
    Cash and Cash EquivalentsThe Company considers all highly liquid cash investments with original maturities of three
months or less when purchased to be cash equivalents.
  67




---



##### 



FORT UNION GAS GATHERING, LLC
   (d)
    
    ImbalancesGas imbalances represent differences between gas receipts from customers (shippers) and gas
deliveries to pipelines. Natural gas imbalances are settled in natural gas volumes, subject
to the various contract terms. These contract terms allow the Company to change fuel
retention rates charged to its customers to adjust for volumetric differences between
shippers and pipeline imbalances. The Company values gas imbalances at the appropriate
market price. The pipelines into which the Company delivers the majority of transported
volumes settle all imbalances on a monthly basis. The Company in turn settles all
imbalances with shippers on the Companys system on a monthly basis. Accordingly at
December 31, 2006, the Company did not have any imbalances with third parties.(e)
    
    FuelThe Company is entitled to recoup fuel costs from shippers based upon actual fuel used in
operations. The Company collects fuel charges based upon estimated fuel costs, which are
adjusted periodically to account for differences between estimated fuel charges and actual
fuel used. Any accumulated differences are recorded as an asset or liability to the
shippers. The Company records receivables and payables based upon the fair market price of
fuel in the month in which the differences were generated. As the fuel rates are adjusted
to account for historical differences, the Company reduces the receivable or payable at the
current month average price. At December 31, 2006, the Company had a net fuel payable of
$3,010,483.(f)
    
    Property and equipmentThe Company capitalizes additions and betterments to the gathering system at cost. Normal
repairs and maintenance are expensed as incurred. The assets are depreciated using the
straight-line method over the estimated useful life of the gathering system (30 years).
Gathering system includes the following at December 31, 2006:
 Useful livesProperty and equipment
    
    30 years
    
    $
    64,034,805Computers and office equipment
    
    3-5 years
    
    
    6,74264,041,547Less accumulated depreciation
    
    
    
    
    
    
    (13,154,723
    )Property and equipment, net
    
    
    
    
    
    $
    50,886,824
 (g)
    
    Asset ImpairmentThe Company evaluates its long-lived assets to be held and used for impairment whenever
events or circumstances indicate the carrying value may not be recoverable. An impairment
loss is recorded for assets to be held and used when its carrying amount is not recoverable
from future estimated cash flows and exceeds its fair value. Assets classified as
held-for-sale are recorded at the lower of their carrying amount or fair value less cost to
sell. During the year ended December 31, 2006, management identified no indications of
potential impairment of the Companys long-lived assets.
  68




---



##### 



FORT UNION GAS GATHERING, LLC
   (h)
    
    Deferred Financing CostsCosts associated with securing debt are capitalized and amortized over the term of the
associated debt. During the year ended December 31, 2006, the Company recorded interest
expense of $221,820 from the amortization of deferred financing costs.(i)
    
    Fair Value of Financial InstrumentsThe Companys financial instruments consist of cash, accounts receivable, accounts payable,
other current liabilities, long-term debt, and interest rate swaps. Except for long-term
debt, the carrying amounts of financial instruments approximate fair value due to their
short maturities. The interest rate swaps are recorded at fair value in the accompanying balance
sheet, as a $232,381 liability at December 31, 2006 reflecting a cumulative unrealized
loss. At December 31, 2006, based on rates available for similar types of debt, the fair
value of long-term debt approximated its carrying amount.(j)
    
    Concentration of Credit RiskSubstantially all of the Companys accounts receivable at December 31, 2006 result from the
transportation of gas earned from other companies in the oil and gas industry. This
concentration of customers may impact the Companys overall credit risk, either positively
or negatively, in that these entities may be similarly affected by industrywide changes in
economic or other conditions. Such receivables are generally not collateralized.Trade accounts receivable for 2006 includes receivables from three members (or their
affiliates) representing 40.1%, 25.7%, and 23.9% of total accounts receivable.Substantially all of the Companys revenues are from the Companys members or their
affiliates. The portion of revenue for 2006 that included transport fees from the members
and affiliates is as follows:
 Cantera
    
    
    18.1
    %Crestone
    
    
    24.7Western
    
    
    34.4Bargath
    
    
    21.198.3
    %
 (k)
    
    Income TaxesDue to the Companys limited liability status, the tax consequences of the Company pass
through to the individual members. Accordingly, no provision has been made for federal,
state, or local taxes.(l)
    
    Comprehensive IncomeComprehensive income includes all changes in equity during a period from nonowner sources.
During the year ended December 31, 2006, there were no transactions that were required to
be reported as adjustments to net income to determine comprehensive income.
  69




---



##### 



FORT UNION GAS GATHERING, LLC
   (m)
    
    Derivative Financial InstrumentsThe Company recognizes derivative financial instruments in the balance sheet as either an
asset or liability measured at fair value. Changes in the derivatives fair value are
recognized currently in earnings unless specific hedge accounting criteria are met. If
derivative financial instruments qualify for hedge accounting, unrealized gains and losses
are recorded as a component of accumulated other comprehensive income in the statement of
members equity.
 (3)
    
    Interest Rate SwapsThe Company had interest rate swap agreements in place at December 31, 2006 covering
$17,517,696 of debt. The Company is the fixed rate payor in these agreements at fixed rates
ranging from 5.98% to 5.99%. The interest rate swaps reprice concurrent with the repricing of
the related debt, thus the variable rate portion of the swap agreements will always equal the
base rate in the debt agreement. The purpose of these swap agreements is to hedge the interest
rate risk associated with the variable interest rate of the outstanding debt. The counter
parties to these swap agreements are the same banks who hold the notes payable described in
note 4. These swap agreements have identical maturity, amortization of loan balance, and
floating interest rates as the notes payable.The fair value of these interest rate swaps is determined based on the amount at which the
fixed interest rate differs from the quoted market rate. At December 31, 2006, the fair value
of these interest rate swaps was a liability of approximately $232,381. During the year ended
December 31, 2006, the Company paid settlements of approximately $195,093 under these swap
agreements, which were recorded as increases to interest expense.(4)
    
    DebtLong-term debt consists of the following notes payable at December 31, 2006:
 Note payable to two banks; due September 30, 2009; secured
by all of the fixed assets of the Company; escalating
principal payments and interest are due quarterly; interest
payable at LIBOR plus an escalating margin as set forth
in the debt agreement (approximately 7.0% at
December 31, 2006)
    
    $
    14,020,101Note payable to two banks; due September 30, 2009; secured
by all of the fixed assets of the Company; escalating
principal payments and interest are due quarterly; interest
at LIBOR plus an escalating margin as set forth in the debt
agreement (approximately 7.0% at December 31, 2006)
    
    
    8,146,70922,166,810Less current portion
    
    
    7,533,636Long-term debt
    
    $
    14,633,174
  70




---



##### 



FORT UNION GAS GATHERING, LLC
     Year ending December 31:2007
    
    $
    7,533,6362008
    
    
    8,114,7322009
    
    
    6,518,442$
    22,166,810
 (5)
    
    Transactions with Affiliated/Related PartiesThe Company purchases certain services from Western and Cantera. These services include
management and administrative services related to the operations of the gathering system. In
2006, the Company incurred approximately $667,108 for reimbursement of actual expenses paid by
Western and approximately $78,000 for reimbursement of actual expenses paid to Cantera.During the year ended December 31, 2006, the five members of the Company accounted for
substantially all of the Companys total revenue. At December 31, 2006, accounts receivable
includes approximately $3,274,456 due from these members. Accounts payable due to related
parties at December 31, 2006 includes $7,013 due to members primarily for services rendered.
Distributions due to Common Members at December 31, 2006 totaled $4,000,000.(6)
    
    CommitmentsThe Company has various operating leases for office facilities and equipment, which all have
month-to-month terms. Total rental expense charged to operations during 2006 was $31,766.From time to time, the Company is involved in legal administrative proceedings or claims, which
arise in the ordinary course of its business. While such matters always contain an element of
uncertainty, management believes that matters of which they are aware will not individually
or in the aggregate have a material adverse effect on the Companys financial position or
results of operations.
 71




---



##### 



(b) Pro Forma Financial Information.
  COPANO ENERGY, L.L.C. AND SUBSIDIARIES
 UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
 Introduction
     72




---



##### 



COPANO ENERGY, L.L.C.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 2007
 Historical
    
    
    Historical
    
    
    TransactionsCopano
    
    
    Cantera
    
    
    Adjustments
    
    
    Pro Forma(In thousands)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    45,886
    
    
    $
    24,142
    
    
    $
    157,125
    (a)
    
    $
    70,028177,875
    (a)(4,175
    )(c)300,000
    (d)(8,469
    )(d)(622,356
    )(e)Accounts receivable, net
    
    
    94,233
    
    
    
    13,699
    
    
    
    
    
    
    
    107,932Risk management assets
    
    
    9,823
    
    
    
    
    
    
    
    
    
    
    
    9,823Prepayments and other current assets
    
    
    2,244
    
    
    
    2,362
    
    
    
    
    
    
    
    4,606Total current assets
    
    
    152,186
    
    
    
    40,203
    
    
    
    
    
    
    
    192,389Property, plant and equipment, net
    
    
    658,406
    
    
    
    5,697
    
    
    
    18,660
    (e)
    
    
    682,763Intangible assets, net
    
    
    137,688
    
    
    
    
    
    
    
    61,100
    (e)
    
    
    198,788Investment in unconsolidated affiliates
    
    
    18,428
    
    
    
    43,799
    
    
    
    576,916
    (e)
    
    
    639,143Risk management assets
    
    
    23,878
    
    
    
    
    
    
    
    
    
    
    
    23,878Other assets, net
    
    
    12,664
    
    
    
    177
    
    
    
    8,469
    (d)
    
    
    21,211(99
    ) (e)Total assets
    
    $
    1,003,250
    
    
    $
    89,876
    
    
    $
    665,046
    
    
    $
    1,758,172LIABILITIES AND MEMBERS CAPITALCurrent liabilities:Accounts payable
    
    $
    128,387
    
    
    $
    7,726
    
    
    $
    
    
    
    $
    136,113Note payable
    
    
    378
    
    
    
    10,000
    
    
    
    (10,000
    ) (e)
    
    
    378Risk management liabilities
    
    
    5,772
    
    
    
    
    
    
    
    
    
    
    
    5,772Income taxes payable
    
    
    
    
    
    
    3,301
    
    
    
    
    
    
    
    3,301Other current liabilities
    
    
    15,570
    
    
    
    413
    
    
    
    
    
    
    
    15,983Total current liabilities
    
    
    150,107
    
    
    
    21,440
    
    
    
    (10,000
    )
    
    
    161,547Long-term debt
    
    
    349,000
    
    
    
    
    
    
    
    300,000
    (d)
    
    
    649,000Deferred tax provision
    
    
    917
    
    
    
    
    
    
    
    
    
    
    
    917Risk management and other noncurrent liabilities
    
    
    16,774
    
    
    
    
    
    
    
    157
    (f)
    
    
    16,931Members capital:Common units
    
    
    491,714
    
    
    
    
    
    
    
    157,125
    (a)
    
    
    646,904(1,935
    ) (c)Class C units
    
    
    54,000
    
    
    
    
    
    
    
    
    
    
    
    54,000Class D units
    
    
    
    
    
    
    
    
    
    
    112,500
    (b)
    
    
    112,450(50
    ) (c)Class E units
    
    
    
    
    
    
    
    
    
    
    177,875
    (a)
    
    
    175,685(2,190
    ) (c)Paid-in capital
    
    
    16,966
    
    
    
    68,436
    
    
    
    (68,436
    ) (e)
    
    
    16,966Accumulated (deficit) earnings
    
    
    (9,978
    )
    
    
    
    
    
    
    
    
    
    
    (9,978
    )Accumulated other comprehensive loss
    
    
    (66,250
    )
    
    
    
    
    
    
    
    
    
    
    (66,250
    )Total members capital
    
    
    486,452
    
    
    
    68,436
    
    
    
    374,889
    
    
    
    929,777Total liabilities and members capital
    
    $
    1,003,250
    
    
    $
    89,876
    
    
    $
    665,046
    
    
    $
    1,758,172
 See accompanying notes to the unaudited pro forma consolidated financial statements.
 73




---



##### 



COPANO ENERGY, L.L.C.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2006
 Historical
    
    
    Historical
    
    
    TransactionsCopano
    
    
    Cantera
    
    
    Adjustments
    
    
    Pro Forma(In thousands, except
per unit amounts)Revenue:Natural gas sales
    
    $
    448,054
    
    
    $
    171,232
    
    
    $
    
    
    
    $
    619,286Natural gas liquids sales
    
    
    369,892
    
    
    
    41,909
    
    
    
    
    
    
    
    411,801Transportation, compression and processing fees
    
    
    16,232
    
    
    
    9,645
    
    
    
    
    
    
    
    25,877Other
    
    
    26,094
    
    
    
    2,195
    
    
    
    (2,195
    )(g)
    
    
    26,094Total revenue
    
    
    860,272
    
    
    
    224,981
    
    
    
    (2,195
    )
    
    
    1,083,058Costs and expenses:Cost of natural gas and natural gas liquids
    
    
    669,158
    
    
    
    214,170
    
    
    
    (17,327
    )(g)
    
    
    866,001Transportation
    
    
    3,026
    
    
    
    
    
    
    
    17,327
    (g)
    
    
    20,353Operations and maintenance
    
    
    32,484
    
    
    
    1,168
    
    
    
    58
    (h)
    
    
    33,72010
    (i)Depreciation and amortization
    
    
    31,993
    
    
    
    671
    
    
    
    4,911
    (j)
    
    
    37,575General and administrative
    
    
    26,535
    
    
    
    5,333
    
    
    
    (2,195
    )(g)
    
    
    29,781108
    (h)Taxes other than income
    
    
    2,061
    
    
    
    
    
    
    
    
    
    
    
    2,061Equity in earnings from unconsolidated affiliates
    
    
    (1,297
    )
    
    
    
    
    
    
    
    
    
    
    (1,297
    )Total costs and expenses
    
    
    763,960
    
    
    
    221,342
    
    
    
    2,892
    
    
    
    988,194Operating income
    
    
    96,312
    
    
    
    3,639
    
    
    
    (5,087
    )
    
    
    94,864Other income (expense):Equity in earnings from unconsolidated affiliates
    
    
    
    
    
    
    20,037
    
    
    
    (19,230
    )(k)
    
    
    807Interest and other income
    
    
    1,706
    
    
    
    604
    
    
    
    
    
    
    
    2,310Interest and other financing costs
    
    
    (32,904
    )
    
    
    (1,526
    )
    
    
    14,017
    (l)
    
    
    (57,617
    )(37,204
    )(m)Income before income taxes
    
    
    65,114
    
    
    
    22,754
    
    
    
    (47,504
    )
    
    
    40,364Provision for income taxes
    
    
    
    
    
    
    (2,886
    )
    
    
    
    
    
    
    (2,886
    )Net income
    
    $
    65,114
    
    
    $
    19,868
    
    
    $
    (47,504
    )
    
    $
    37,478Basic net income per common unit:Net income per common unit
    
    $
    1.77
    
    
    
    
    
    
    
    
    
    
    $
    0.91Weighted average number of common units
    
    
    29,752
    
    
    
    
    
    
    
    4,533
    (n)
    
    
    34,285Diluted net income per common unit: (o)Net income per common unit
    
    $
    1.75
    
    
    
    
    
    
    
    
    
    
    $
    0.71Weighted average number of common units
    
    
    30,180
    
    
    
    
    
    
    
    4,533
    (n)
    
    
    43,5583,246
    (n)5,599
    (n)Basic net income per subordinated unit:Net income per subordinated unit
    
    $
    1.77
    
    
    
    
    
    
    
    
    
    
    $
    0.91Weighted average number of subordinated units
    
    
    7,038
    
    
    
    
    
    
    
    
    
    
    
    7,038Diluted net income per subordinated unit:Net income per subordinated unit
    
    $
    1.77
    
    
    
    
    
    
    
    
    
    
    $
    0.91Weighted average number of subordinated units
    
    
    7,038
    
    
    
    
    
    
    
    
    
    
    
    7,038
 See accompanying notes to the unaudited pro forma consolidated financial statements.
 74




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##### 



COPANO ENERGY, L.L.C.
 UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2007
 Historical
    
    
    Historical
    
    
    TransactionCopano
    
    
    Cantera
    
    
    Adjustments
    
    
    Pro Forma(In thousands, except per unit amounts)Revenue:Natural gas sales
    
    $
    251,329
    
    
    $
    61,717
    
    
    $
    
    
    
    $
    313,046Natural gas liquids sales
    
    
    203,912
    
    
    
    34,848
    
    
    
    
    
    
    
    238,760Transportation, compression and processing fees
    
    
    8,440
    
    
    
    6,012
    
    
    
    
    
    
    
    14,452Condensate and other
    
    
    29,027
    
    
    
    1,084
    
    
    
    (1,084
    )(g)
    
    
    29,027Total revenue
    
    
    492,708
    
    
    
    103,661
    
    
    
    (1,084
    )
    
    
    595,285Costs and expenses:Cost of natural gas and natural gas liquids
    
    
    405,846
    
    
    
    94,783
    
    
    
    (8,642
    )(g)
    
    
    491,987Transportation
    
    
    2,104
    
    
    
    
    
    
    
    8,642
    (g)
    
    
    10,746Operations and maintenance
    
    
    18,173
    
    
    
    588
    
    
    
    29
    (h)
    
    
    18,7966
    (i)Depreciation and amortization
    
    
    18,295
    
    
    
    291
    
    
    
    2,501
    (j)
    
    
    21,087General and administrative
    
    
    15,216
    
    
    
    2,281
    
    
    
    (1,084
    )(g)
    
    
    16,46754
    (h)Taxes other than income
    
    
    1,556
    
    
    
    
    
    
    
    
    
    
    
    1,556Equity in earnings from unconsolidated affiliates
    
    
    (1,618
    )
    
    
    
    
    
    
    
    
    
    
    (1,618
    )Total costs and expenses
    
    
    459,572
    
    
    
    97,943
    
    
    
    1,506
    
    
    
    559,021Operating income
    
    
    33,136
    
    
    
    5,718
    
    
    
    (2,590
    )
    
    
    36,264Equity in earnings from unconsolidated affiliates
    
    
    
    
    
    
    9,939
    
    
    
    (9,615
    )(k)
    
    
    324Interest and other income
    
    
    1,325
    
    
    
    638
    
    
    
    
    
    
    
    1,963Interest and other financing costs
    
    
    (11,372
    )
    
    
    (662
    )
    
    
    3,105
    (l)
    
    
    (26,706
    )(17,777
    )(m)Income before income taxes
    
    
    23,089
    
    
    
    15,633
    
    
    
    (26,877
    )
    
    
    11,845Provision for income taxes
    
    
    (1,079
    )
    
    
    (382
    )
    
    
    
    
    
    
    (1,461
    )Net income
    
    $
    22,010
    
    
    $
    15,251
    
    
    $
    (26,877
    )
    
    $
    10,384Basic net income per common unit:Net income per common unit
    
    $
    0.53
    
    
    
    
    
    
    
    
    
    
    $
    0.23Weighted average number of common units
    
    
    40,556
    
    
    
    
    
    
    
    4,533
    (n)
    
    
    45,089Diluted net income per common unit:Net income per common unit
    
    $
    0.52
    
    
    
    
    
    
    
    
    
    
    $
    0.19Weighted average number of common units
    
    
    41,199
    
    
    
    
    
    
    
    4,533
    (n)
    
    
    54,5773,246
    (n)5,599
    (n)Basic net income per subordinated unit: (o)Net income per subordinated unit
    
    $
    0.26
    
    
    
    
    
    
    
    
    
    
    $
    0.11Weighted average number of subordinated units
    
    
    1,711
    
    
    
    
    
    
    
    
    
    
    
    1,711Diluted net income per subordinated unit:Net income per subordinated unit
    
    $
    0.26
    
    
    
    
    
    
    
    
    
    
    $
    0.11Weighted average number of subordinated units
    
    
    1,711
    
    
    
    
    
    
    
    
    
    
    
    1,711
 See accompanying notes to the unaudited pro forma consolidated financial statements.
 75




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##### 



COPANO ENERGY, L.L.C. AND SUBSIDIARIES
 NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
 Transactions
  
    
    $335.0 million aggregate private placement of equity comprising 4,533,324 common
units at a price of $34.66 per common unit for aggregate proceeds of $157.1 million and
5,598,836 Class E units at a price of $31.77 per Class E unit for aggregate proceeds of
$177.9 million. The common units represent limited liability company interests in
Copano. Holders of the common units are entitled to participate in distributions and exercise
the rights and privileges available to unitholders under the limited liability company
agreement. The Class E units represent a new class of Copano units that have no voting
rights other than as required by law, are subordinate to common units on dissolution and
liquidation and have no distribution rights until Copanos distribution with respect to
the fourth quarter of 2008, when the Class E units will become entitled to a special
quarterly distribution equal to 110% of the quarterly common distribution. The Class E
units will convert into common units upon Copanos payment of its distribution to common
unitholders with respect to the third quarter of 2008, if the conversion terms of the
Class E units are approved by a vote of Copanos unitholders. Copano agreed to hold a
special meeting of its unitholders to consider this proposal as soon as feasible
following the completion of the Cantera acquisition but in no event later than 180 days
thereafter.
    
    Fees and expenses associated with the private placement of equity, estimated to be
approximately $4.2 million.
    
    Borrowings of $300.0 million under the amended senior secured revolving credit facility and
payment of $8.5 million for related debt issuance costs.
    
    The acquisition of Cantera.
    
    The issuance of 3,245,817 Class D units to the sellers of Cantera. The Class D units
represent a new class of equity interest and will convert into common units on a
one-for-one basis upon the earlier of (a) payment of Copanos common unit distribution
with respect to the fourth quarter of 2009 or (b) the payment by Copano of $6.00 in
cumulative distributions per unit to its common unitholders commencing with Copanos
common unit distribution with respect to the fourth quarter of 2007. Until they
convert into common units, the Class D units will not be entitled to receive cash
distributions. The Class D units will otherwise have the same terms and conditions as
the Copano common units, including with respect to voting rights. No vote of Copanos
common unitholders will be required to convert the Class D units to Copano common units.
    
    The payment of expenses and fees associated with the acquisition of Cantera.
 Pro Forma Adjustments:
 Balance Sheet
  76




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##### 



COPANO ENERGY, L.L.C. AND SUBSIDIARIES
 NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS  (continued)
     Net proceeds for private placement of equity
    
    
    
    
    
    $
    443.4Borrowings under amended senior secured credit facility
    
    
    
    
    
    
    291.5Total purchase price of Cantera
    
    
    
    
    
    
    734.9Historical nets assets of Cantera as of June 30, 2007
    
    
    68.5Assets of Cantera not acquired
    
    
    (0.1
    )Liabilities of Cantera not acquired
    
    
    10.0Historical net assets acquired
    
    
    78.4
    
    
    
    78.4Purchase price adjustments
    
    
    
    
    
    
    595.4Fair value of assets acquired
    
    
    
    
    
    
    673.8Excess of purchase price over fair value of assets acquired
    
    
    
    
    
    $
    61.1
  PreliminaryPurchasePrice
    
    
    PreliminaryHistorical
    
    
    Adjustments
    
    
    Fair ValueProperty, plant and equipment, net (see Note (j) below)
    
    $
    5.7
    
    
    $
    18.7
    
    
    $
    24.4Investment
in unconsolidated affiliates (see Note (k) below)
    
    
    43.8
    
    
    
    576.9
    
    
    
    620.7Other noncurrent liabilities (see Note (i) below)
    
    
    
    
    
    
    (0.2
    )
    
    
    (0.2
    )$
    49.5
    
    
    $
    595.4
    
    
    $
    644.9Intangibles-customer contracts(see Note (j) below)
    
    $
    
    
    
    $
    61.1
    
    
    $
    61.1
  Statements of Operations
  77




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##### 



COPANO ENERGY, L.L.C. AND SUBSIDIARIES
 NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS  (continued)
         (c) Exhibits.
 Exhibit No.
    
    Description23.1
    
    
    Consent of KPMG LLP
 78




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##### 



SIGNATURES
  COPANO ENERGY, L.L.C.Date:  October 29, 2007
    By:
    /s/ Matthew J. AssiffName:
    Matthew J. AssiffTitle:
    Senior Vice President and Chief
Financial Officer 79




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##### 



Exhibit No.
    
    Description23.1
    
    

Consent
of KPMG LLP