**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

** **

**Form 10-Q/A**

 
| **ý** | **Quarterly report pursuant to Section 13 or 15(d) of the  Securities Exchange Act of 1934** |
|------------|----------------------------------------------------------------------------------------------|

** **

**For thequarterly period ended March 31, 2005**

 

**or**

 
| **o** | **Transition report pursuant to Section 13 or 15(d) of the  Securities Exchange Act of 1934** |
|-------|-----------------------------------------------------------------------------------------------|

 
| ** ** | **For the transition period  from                      to                      ** |
|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**Commission File Number 333-120129**

** **

**PRB Gas Transportation, Inc.**

(Exact name of registrant as specified inits charter)

 
| **Nevada**                                                      | ** ** | **20-0563497**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other jurisdiction  of incorporation or organization) | ** ** | (I.R.S. Employer  Identification No.) |
| ** **                                                      | ** ** | ** **                            |
| **1875 Lawrence, Suite 450  Denver, CO**                        | ** ** | **80202**                             |
| (Address of principal executive offices*)*                      | ** ** | (Zip Code)                            |

** **

**(303) 308-1330(303) 308-1590 (fax)**(Registrant’s telephone number, including area code)

** **

**n/a**

 (Formername, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days. Yes o    No ý

 

Indicate by check mark whether the registrantis an accelerated filer (as defined by Rule 12b-2 of the ExchangeAct). Yes o    No ý

 

Indicate by check mark whether the registrantis a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes o    No ý

 

Indicate the number of shares outstanding ofeach of the issuer’s classes of common stock as of the latest practicable date.

 

As of May 23, 2005, the registrant had7,050,000 shares of common stock outstanding.

 

 

----

 

**TABLE OF CONTENTS**

 
| **PART I.**       | **FINANCIAL  INFORMATION**                                                                                                                |   |
|-------------------|-------------------------------------------------------------------------------------------------------------------------------------------|--------|
| ** **        | ** **                                                                                                                                |   |
| Item 1.           | Financial Statements                                                                                                                      |   |
|              |                                                                                                                                      |   |
|              | Balance Sheets as of March 31, 2005 and December  31, 2004                                                                                |   |
|              |                                                                                                                                      |   |
|              | Statements of Operations for the three  months ended March 31, 2005 and 2004                                                              |   |
|              |                                                                                                                                      |   |
|              | Statements of Changes in  Stockholders’ Equity for the three month period ended March 31, 2005 and the  year ended December 31, 2004 |   |
|              |                                                                                                                                      |   |
|              | Statements of Cash Flows for the three  months ended March 31, 2005 and 2004                                                              |   |
|              |                                                                                                                                      |   |
|              | Notes to Unaudited Financial  Statements                                                                                                  |   |
|              |                                                                                                                                      |   |
| Item 2.           | Management’s Discussion and  Analysis of Financial Condition and Results of Operations                                               |   |
|              |                                                                                                                                      |   |
| Item 3.           | Quantitative and Qualitative  Disclosure About Market Risk                                                                                |   |
|              |                                                                                                                                      |   |
| Item 4.           | Controls and Procedures                                                                                                                   |   |
| ** **        |                                                                                                                                      |   |
| **PART II.** | **OTHER INFORMATION**                                                                                                                     |   |
| ** **        | ** **                                                                                                                                |   |
| Item 1.           | Legal Proceedings                                                                                                                         |   |
|              |                                                                                                                                      |   |
| Item 2.           | Changes in Securities, Use  of Proceeds and Issuer Purchases of Equity Securities                                                         |   |
|              |                                                                                                                                      |   |
| Item 3.           | Defaults Upon Senior  Securities                                                                                                          |   |
|              |                                                                                                                                      |   |
| Item 4.           | Submission of Matters to a Vote  of Security Holders                                                                                      |   |
|              |                                                                                                                                      |   |
| Item 5.           | Other Information                                                                                                                         |   |
|              |                                                                                                                                      |   |
| Item 6.           | Exhibits and Reports on Form  8-K                                                                                                         |   |
|              |                                                                                                                                      |   |
|              | Signatures                                                                                                                                |   |

 

----

 

**PART I FINANCIAL INFORMATION**

**Item 1.  Financial Statements**

 

This Form 10-Q/A for thequarterly period ended March 31, 2005 is being filed for the purpose ofrestating PRB Gas Transportation, Inc.’s unaudited financial statements as ofand for the three months ended March 31, 2005. The Company acquired a contracteffective August 2004.  During June 2005the Company determined that it had incorrectly invoiced this customer for theperiod August 2004 through April 2005. The original invoices for this period did not take into account that theagreement includes a minimum contract billing provision.  The Company invoiced the customer for thedifference between the original invoices and the corrected invoices in June2005.  The Company was not able todetermine whether the customer would pay the difference due and as such did notrestate its financial statements until collection was assured. The customerpaid the Company for the difference due (approximately $304 thousand) duringDecember 2005, including approximately $105 thousand in respect to the threemonths ended March 31, 2005. Accordingly, the Company has restated its financialstatements.

Conforming changes have beenmade to the notes to the financial statements and management’s discussion andanalysis of financial condition and results of operations included in thefollowing 10-Q/A. See Note 2 in the notes to the unaudited financial statementsfor further information on this restatement. This Form 10-Q/A has not beenupdated for events or information subsequent to the filing of the original Form10-Q except in relation to the foregoing. Accordingly, this Form 10-Q/A shouldbe read in conjunction with the Company’s filings made with the SEC subsequentto the filing of the original Form 10-Q.

 

1

----

 

**PRB Gas Transportation, Inc.**

**Balance Sheets**

** **
| ** **                                                                               | ** ** | **March 31, 2005**            | ** ** | **December 31, 2004** | ** ** |
|------------------------------------------------------------------------------------------|------------|-------------------------------|------------|-----------------------|------------|
| ** **                                                                               | ** ** | **(Unaudited)**               | ** ** | ** **            | ** ** |
| ** **                                                                               | ** ** | **(as Restated, see Note 2)** | ** ** |
| **Assets**                                                                               | ** ** | ** **                    | ** ** | ** **            | ** ** |
| ** **                                                                               | ** ** | ** **                    | ** ** | ** **            | ** ** |
| Current assets                                                                           | ** ** | ** **                    | ** ** | ** **            | ** ** |
| Cash                                                                                     |       | $                             | 101,043    |                  | $          | 320,150 |   |
| Accounts receivable                                                                      |       | 556,630                       |       | 423,540               |       |
| Prepaid expenses                                                                         |       | 153,050                       |       | 103,760               |       |
| Total current assets                                                                     |       | 810,723                       |       | 847,450               |       |
|                                                                                     |       |                          |       |                  |       |
| Property and  equipment, net                                                             |       | 8,002,201                     |       | 8,136,203             |       |
|                                                                                     |       |                          |       |                  |       |
| Other  non-current assets                                                                |       |                          |       |                  |       |
| Deferred costs of raising capital                                                        |       | 357,278                       |       | 267,068               |       |
| Deposits                                                                                 |       | 450                           |       | 3,517                 |       |
| Contracts, net                                                                           |       | 2,087,724                     |       | 2,145,240             |       |
| Total other non-current assets                                                           |       | 2,445,452                     |       | 2,415,825             |       |
|                                                                                     |       |                          |       |                  |       |
| Total assets                                                                             |       | $                             | 11,258,376 |                  | $          | 11,399,478 |   |
|                                                                                     |       |                          |       |                  |       |
| **Liabilities and Stockholders’ Equity**                                            |       |                          |       |                  |       |
|                                                                                     |       |                          |       |                  |       |
| Current  liabilities                                                                     |       |                          |       |                  |       |
| Accounts payable                                                                         |       | $                             | 322,794    |                  | $          | 137,991 |   |
| Accrued expenses and other current  liabilities                                          |       | 108,349                       |       | 19,205                |       |
| Accrued TOP acquisition costs                                                            |       | 196,949                       |       | 200,000               |       |
| Dividends payable                                                                        |       | 132,903                       |       | 133,683               |       |
| Compressor disposal liability                                                            |       | 25,000                        |       | 25,000                |       |
| Note payable                                                                             |       | 1,500,000                     |       | 1,500,000             |       |
| Total current liabilities                                                                |       | 2,285,995                     |       | 2,015,879             |       |
|                                                                                     |       |                          |       |                  |       |
| Asset  retirement obligation                                                             |       | 66,100                        |       | 64,804                |       |
| Total liabilities                                                                        |       | 2,352,095                     |       | 2,080,683             |       |
|                                                                                     |       |                          |       |                  |       |
| Commitments  and Contingencies                                                           |       |                          |       |                  |       |
|                                                                                     |       |                          |       |                  |       |
| Stockholders’  equity                                                               |       |                          |       |                  |       |
| Capital, 50,000,000 shares authorized, par  value $0.001, 5,639,000 shares undesignated  |       |                          |       |                  |       |
| Series A 10% Convertible Preferred,  2,400,000 shares authorized, issued and outstanding |       | 2,400                         |       | 2,400                 |       |
| Series B 5% Convertible Preferred,  1,550,000 shares authorized, issued and outstanding  |       | 1,550                         |       | 1,550                 |       |
| Series C Convertible Preferred, 411,000  shares authorized, issued and outstanding       |       | 411                           |       | 411                   |       |
| Common stock, 40,000,000 shares authorized,  1,600,000 issued, 800,000 outstanding       |       | 1,600                         |       | 1,600                 |       |
| Treasury stock                                                                           |       | (800,000                      | )          | (800,000              | )          |
| Additional paid-in-capital                                                               |       | 10,581,027                    |       | 10,763,372            |       |
| Accumulated deficit                                                                      |       | (880,707                      | )          | (650,538              | )          |
| Total stockholders’ equity                                                          |       | 8,906,281                     |       | 9,318,795             |       |
|                                                                                     |       |                          |       |                  |       |
| Total  liabilities and stockholders’ equity                                         |       | $                             | 11,258,376 |                  | $          | 11,399,478 |   |

 

Theaccompanying notes are an integral part of these unaudited financial statements.

 

2

----

 

**PRB Gas Transportation, Inc.**

**Statements of Operations**

**(Unaudited)**

 
| ** **                                                 | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                 | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| ** **                                                 | ** ** | **(as Restated, see Note 2)**    | ** ** | ** ** | ** ** |
| Gas gathering revenues:                                    |       |                             |       |   |   |
| Related party                                              |       | $                                | —     |   | $ | 197,484 |   |
| Third party                                                |       | 841,057                          |       | 201,427 |   |
| Total revenues                                             |       | 841,057                          |       | 398,911 |   |
|                                                       |       |                             |       |   |   |
| Expenses:                                                  |       |                             |       |   |   |
| Operating                                                  |       | 490,792                          |       | 218,770 |   |
| Depreciation and amortization                              |       | 277,454                          |       | 83,636 |   |
| General and administrative                                 |       | 261,502                          |       | 88,955 |   |
| Total expenses                                             |       | 1,029,748                        |       | 391,361 |   |
|                                                       |       |                             |       |   |   |
| Operating  (loss) income                                   |       | (188,691                         | )          | 7,550 |   |
|                                                       |       |                             |       |   |   |
| Other income  (expense):                                   |       |                             |       |   |   |
| Interest income                                            |       | 227                              |       | 3,663 |   |
| Miscellaneous income                                       |       | 300                              |       | — |   |
| Interest expense                                           |       | (42,005                          | )          | — |   |
| Total other (expense) income                               |       | (41,478                          | )          | 3,663 |   |
|                                                       |       |                             |       |   |   |
| Net (loss)  income                                         |       | (230,169                         | )          | 11,213 |   |
|                                                       |       |                             |       |   |   |
| Convertible  preferred stock dividends                     |       | (182,345                         | )          | (104,396 | ) |
|                                                       |       |                             |       |   |   |
| Net loss  applicable to common stock                       |       | $                                | (412,514   | ) | $ | (93,183 | ) |
|                                                       |       |                             |       |   |   |
| Net loss per  share – basic and diluted               |       | $                                | (0.52      | ) | $ | (0.06 | ) |
|                                                       |       |                             |       |   |   |
| Basic and  diluted weighted average shares outstanding (1) |       | 800,000                          |       | 1,600,000 |   |

 

----

(1)          Excludes all shares of common stock issuable uponconversion of the preferred stock to common stock.  See Note 1.

 

Theaccompanying notes are an integral part of these unaudited financialstatements.

 

3

----

 

**PRB GasTransportation, Inc.**

**Statement of Changes in Stockholders’ Equity**

**(Unaudited)**

** **
| ** **                                        | ** ** | **Shares** | ** ** | **Amount**                    | ** ** |
|---------------------------------------------------|------------|------------|------------|-------------------------------|------------|
| ** **                                        | ** ** | ** ** | ** ** | **(as Restated, see Note 2)** | ** ** |
| **Series A  10% Convertible Preferred stock**     | ** ** | ** ** | ** ** | ** **                    | ** ** |
| Balance,  December 31, 2004                       |       | 2,400,000  |       | $                             | 2,400      |   |
| First  quarter activity                           |       | —     |       | —                        |       |
| Balance,  March 31, 2005                          |       | 2,400,000  |       | 2,400                         |       |
| ** **                                        | ** ** | ** ** | ** ** | ** **                    | ** ** |
| **Series B  5% Convertible Preferred stock**      | ** ** | ** ** | ** ** | ** **                    | ** ** |
| Balance,  December 31, 2004                       |       | 1,550,000  |       | 1,550                         |       |
| First  quarter activity                           |       | —     |       | —                        |       |
| Balance,  March 31, 2005                          |       | 1,550,000  |       | 1,550                         |       |
|                                              |       |       |       |                          |       |
| **Series C  Convertible Preferred stock**         | ** ** | ** ** | ** ** | ** **                    | ** ** |
| Balance,  December 31, 2004                       |       | 411,000    |       | 411                           |       |
| First  quarter activity                           |       | —     |       | —                        |       |
| Balance,  March 31, 2005                          |       | 411,000    |       | 411                           |       |
|                                              |       |       |       |                          |       |
| **Common  stock**                                 |       |       |       |                          |       |
| Balance,  December 31, 2004                       |       | 800,000    |       | 1,600                         |       |
| First  quarter activity                           |       | —     |       | —                        |       |
| Balance,  March 31, 2005                          |       | 800,000    |       | 1,600                         |       |
|                                              |       |       |       |                          |       |
| **Treasury  stock**                               |       |       |       |                          |       |
| Balance,  December 31, 2004                       |       | 800,000    |       | (800,000                      | )          |
| First  quarter activity                           |       | —     |       | —                        |       |
| Balance,  March 31, 2005                          |       | 800,000    |       | (800,000                      | )          |
|                                              |       |       |       |                          |       |
| **Additional  paid-in-capital**                   |       |       |       |                          |       |
| Balance,  December 31, 2004                       |       |       | ** ** | 10,763,372                    | ** ** |
| First  quarter activity                           |       |       |       |                          |       |
| Series A dividends                                |       |       |       | (124,547                      | )          |
| Series B dividends                                |       |       |       | (57,798                       | )          |
| Balance,  March 31, 2005                          |       |       |       | 10,581,027                    |       |
|                                              |       |       |       |                          |       |
| **Accumulated  deficit**(as Restated, see Note 2) |       |       |       |                          |       |
| Balance,  December 31, 2004                       |       |       |       | (650,538                      | )          |
| First  quarter activity                           |       |       |       | (230,169                      | )          |
| Balance,  March 31, 2005                          |       |       |       | (880,707                      | )          |
| **Total  stockholders’ equity**              |       |       |       | $                             | 8,906,281  |   |

 

Theaccompanying notes are an integral part of these unaudited financialstatements.

 

4

----

 

**PRB Gas Transportation, Inc.**

**Statements of Cash Flows**

**(Unaudited)**

 
| ** **                                                                                         | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                         | ** ** | **2005**                         | ** ** | **2004** | ** ** |
| ** **                                                                                         | ** ** | **(as Restated, see Note 2)**    | ** ** | ** ** | ** ** |
| Cash flows from operating activities                                                               |       |                             |       |   |   |
| Net (loss) income                                                                                  |       | $                                | (230,169   | ) | $ | 11,213 |   |
| Adjustments to reconcile net loss (income)  to net cash provided by (used in)operating activities: |       |                             |       |   |   |
| Depreciation and amortization                                                                      |       | 276,158                          |       | 82,436 |   |
| Accretion                                                                                          |       | 1,296                            |       | 1,200 |   |
| Changes in assets and liabilities:                                                                 |       |                             |       |   |   |
| Accounts receivable                                                                                |       | (133,090                         | )          | (223,127 | ) |
| Prepaid expenses                                                                                   |       | (49,290                          | )          | (95,715 | ) |
| Deposits                                                                                           |       | 3,067                            |       | (125,509 | ) |
| Accounts payable                                                                                   |       | 184,803                          |       | 31,973 |   |
| Accrued expenses and other current  liabilities                                                    |       | 89,144                           |       | 19,205 |   |
| Net cash provided by (used in) operating  activities                                               |       | 141,919                          |       | (298,324 | ) |
|                                                                                               |       |                             |       |   |   |
| Cash flows from investing activities                                                               |       |                             |       |   |   |
| Purchases of property and equipment                                                                |       | (84,640                          | )          | — |   |
| Purchase of TOP system                                                                             |       | —                           |       | (1,941,375 | ) |
| Reduction in accrued TOP acquisition costs                                                         |       | (3,051                           | )          | — |   |
| Net cash used in investing activities                                                              |       | (87,691                          | )          | (1,941,375 | ) |
|                                                                                               |       |                             |       |   |   |
| Cash flows from financing activities                                                               |       |                             |       |   |   |
| Proceeds from issuance of common stock                                                             |       | —                           |       | 20,000 |   |
| Deferred costs of raising capital                                                                  |       | (90,210                          | )          | — |   |
| Proceeds from issuance of Series A  Preferred stock, net of costs                                  |       | —                           |       | 4,987,025 |   |
| Dividends                                                                                          |       | (183,125                         | )          | — |   |
| Net cash (used in) provided by financing  activities                                               |       | (273,335                         | )          | 5,007,025 |   |
|                                                                                               |       |                             |       |   |   |
| Net (decrease) increase in cash                                                                    |       | (219,107                         | )          | 2,767,326 |   |
|                                                                                               |       |                             |       |   |   |
| Cash - beginning of period                                                                         |       | 320,150                          |       | — |   |
|                                                                                               |       |                             |       |   |   |
| Cash - end of period                                                                               |       | $                                | 101,043    |   | $ | 2,767,326 |   |
|                                                                                               |       |                             |       |   |   |
| Supplemental disclosure of non-cash  activity:                                                     |       |                             |       |   |   |
|                                                                                               |       |                             |       |   |   |
| Cash paid for interest                                                                             |       | $                                | 40,580     |   | $ | — |   |

 

The Company recorded an asset retirement obligation totaling $60,004and capitalized the related costs to property and equipment during the quarterended March 31, 2004.

 

The accompanying notes are an integral part of these unauditedfinancial statements.

 

5

----

 

**PRB GAS TRANSPORTATION, INC.**

**Notes to Unaudited Financial Statements**

**March 31, 2005**

 

**Note 1 –Basis of Presentation, Description of Business and Summary of SignificantAccounting Policies**

 

**Descriptionof Business**

 

PRB GasTransportation, Inc. (the “Company” or “PRB”) was incorporated in December 2003and was capitalized and commenced operations in January 2004 when the Companyacquired certain operating assets of TOP Gathering, LLC (“TOP”), which includeda gathering system and related land leases and gas gathering contracts.  Effective August 1, 2004, the Companyacquired certain operating assets of Bear Paw Energy, LLC (“BPE”) that arelocated in the same area of Wyoming as the TOP assets.  The BPE assets included two gatheringsystems, two delivery lines and related land leases and gas gathering andtransportation agreements.  The Companyowns and operates these three gas gathering systems and is in the business ofgathering and transporting natural gas.

** **

**Restatement**

 

During June2005 the Company determined that it had incorrectly invoiced a customer for theperiod August 2004 through April 2005.  TheCompany invoiced the customer in June 2005 for approximately $304 thousand,representing the difference between the original invoices and the correctedinvoices.  The customer paid the Companythe difference due in full during December 2005.  For further information on this restatementsee Note 2 – Restatement of Results.

** **

**Basis ofPresentation**

 

The accompanying unaudited interim 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 Securities and Exchange Commission, do not include all the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, these interim financial statements contain all adjustments, consisting of only normal recurring adjustments, necessary to present fairly the financial position of PRB as of March 31, 2005 and the results of its operations and cash flows for the three months ended March  31, 2005 and 2004. These financial statements should be read in conjunction with the audited financial statements and the summary of significant accounting policies and notes thereto included in the Company’s Registration Statement on Form S-1 dated April 12, 2005.  The results of operations and cash flows for the period are not necessarily indicative of the results of operations or cash flows that can be expected for the year ending December 31, 2005.

 

**Reclassifications**

 

Certain prior period amountshave been reclassified to conform to the current financial statementpresentation.

 

**Significant Accounting Policies**

 

Concentrationsof Credit Risk

 

The Companygrants credit in the normal course of business to customers in the UnitedStates. The Company periodically performs credit analysis and monitors thefinancial condition of its customers to reduce credit risk.  Management periodically reviews accountsreceivable and reduces the carrying amount by a valuation allowance that reflectsmanagement’s best estimate of the amount that may not be collectible.  Allowances for uncollectible accountsreceivable are based on information available and historical experience.  As of March 31, 2005 and 2004 there was noallowance for uncollectible accounts receivable.

 

Revenues from customers whichrepresented 10% or more of the Company’s sales for the three months ended March31, 2005 and 2004 were as follows (as a percentage of sales):

 

6

----

 

**PRB GAS TRANSPORTATION, INC.**

**Notes to Unaudited Financial Statements**

**March 31, 2005**

 
| **Customer** | ** ** | **March 31, 2005**            | ** ** | **March 31, 2004** | ** ** |
|--------------|------------|-------------------------------|------------|--------------------|------------|
| ** **   | ** ** | **(as Restated, see Note 2)** | ** ** | ** **         | ** ** |
| A            |       | 61                            | %          | —             |       |
| B            |       | 8                             | %          | —             |       |
| C            |       | Less than 10                  | %          | 51                 | %          |
| D            |       | Less than 10                  | %          | 32                 | %          |
| E            |       | Less than 10                  | %          | 17                 | %          |

 

Property,Equipment and Contracts

 

Property andequipment is stated at the estimated fair value at the date of acquisition forTOP and BPE assets and at cost for all others. Depreciation is calculated using the straight-line method over theestimated useful lives for owned assets, ranging from 3 to 10 years.

 

Amortizationof the contracts is calculated using the straight-line method over the term ofthe underlying contracts or the estimated life of production which is 10 years.

 

Long-LivedAssets

 

The Companyreviews its long-lived assets for impairment whenever events or changesin circumstances indicate that the carrying amount of the asset may not berecovered.  The Company looks primarilyto the undiscounted future cash flows in its assessment of whether or not long-livedassets have been impaired.

 

AbandonmentLiability

 

The Company follows Statementof Financial Accounting Standards (“SFAS”) No. 143, *“Accountingfor Asset Retirement Obligations”.* The estimated fair value of the future costs associated withdismantlement, abandonment and restoration of facilities was recorded as ofJanuary 1, 2004, the effective date of the TOP acquisition. The net estimatedcosts were discounted to present values using a risk adjusted rate over theestimated economic life of the compressor site. Such costs were capitalized as part of the cost of the related asset andare amortized.  The associated liabilityis classified as a long-term liability and is adjusted when circumstanceschange and for the accretion of expense which is recorded as a component ofdepreciation and amortization.  TheCompany has not yet recorded an asset retirement obligation in conjunction withthe assets acquired from BPE because sufficient information to make areasonable estimate of the fair value of the liability is not available.

 

Use ofEstimates

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets and liabilities,disclosures of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period.  Actual results coulddiffer from those estimates.

 

RevenueRecognition

 

The Companyrecognizes revenue at the time gas is delivered.

 

7

----

 

**PRB GAS TRANSPORTATION, INC.**

**Notes to Unaudited Financial Statements**

**March 31, 2005**

 

 

As permitted under SFAS No. 123, *“Accounting for Stock-Based Compensation,”*as amended by SFAS No. 148, the Company accounts for its stock-basedcompensation for options issued to employees in accordance with the provisionsof Accounting Principles Board Opinion No. 25, *“Accounting for Stock Issued to Employees”*(“APB 25”). As such, the Company accounts for its employee stock-basedcompensation arrangements using the intrinsic value method under whichcompensation expense related to employee stock grants is recorded if the fairvalue of the underlying stock exceeds the exercise price on the grantdate.  Certain pro forma net loss andloss per share disclosures for employee stock option grants are reflected belowas if the fair value method as defined in SFAS No. 123 had been applied.Transactions in equity instruments with non-employees for goods or services areaccounted for using the fair value method.

 

Had compensation cost for the options issued under the PRB EquityCompensation Plan been determined based upon the fair value at the grant datefor options granted, consistent with the provisions of SFAS No. 123, theCompany’s net loss and net loss per share for the three months ended March 31,2005 and 2004 would have been increased to the pro forma amounts indicatedbelow:

 
| ** **                                                                                               | ** ** | **2005**                      | ** ** | **2004**   | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|------------|------------|
| ** **                                                                                               | ** ** | **(as Restated, see Note 2)** | ** ** | ** ** | ** ** |
| Net loss applicable to  common stockholders:                                                             | ** ** | ** **                    | ** ** | ** ** | ** ** |
| As reported                                                                                              |       | $                             | (412,514   | )          | $          | (93,183 | ) |
| Total stock-based employee compensation  expense determined under fair value based method for all awards |       | 23,034                        |       | —     |       |
| Pro forma net loss                                                                                       |       | $                             | (435,548   | )          | $          | (93,183 | ) |
|                                                                                                     |       |                          |       |       |       |
| Net loss per  share, basic and diluted:                                                                  |       |                          |       |       |       |
| As reported                                                                                              |       | $                             | (0.52      | )          | $          | (0.06 | ) |
| Pro forma                                                                                                |       | $                             | (0.54      | )          | $          | (0.06 | ) |

 

The following tablesummarizes activity for options during the three months ended March 31, 2005:

 
| ** **                                              | ** ** | **Number of  Shares** | ** ** | **Weighted Average  Exercise Price** | ** ** |
|---------------------------------------------------------|------------|-----------------------|------------|--------------------------------------|------------|
| Balance,  December 31, 2004                             |       | 220,000               |       | $                                    | 5.50       |   |
| Granted  during the three months ended March 31, 2005   |       | —                |       | —                               |       |
| Exercised  during the three months ended March 31, 2005 |       | —                |       | —                               |       |
|                                                    |       |                  |       |                                 |       |
| Balance,  March 31, 2005                                |       | 220,000               |       | $                                    | 5.50       |   |
|                                                    |       |                  |       |                                 |       |
| Exercisable  at March 31, 2005                          |       | 70,000                |       | $                                    | 5.50       |   |

 

There were no optionsoutstanding at March 31, 2004 or awarded during the three months then ended.

 

The weighted averageremaining contractual life for the options outstanding at March 31, 2005 is 7.7years.  The fair value of each optiongranted is estimated on the date of grant using the Black Scholes optionpricing model.  The weighted average fairvalue of options outstanding at March 31, 2005 is $0.82.  The weighted average fair value of optionsgranted and exercisable at March 31, 2005 is $0.27.

 

8

----

 

**PRB GASTRANSPORTATION, INC.**

**Notes to Unaudited Financial Statements**

**March 31, 2005**

Net Loss PerShare 

 

The Company accounts forearnings (loss) per share (“EPS”) in accordance with SFAS No. 128, “*Earnings per Share*.” Under SFAS No. 128, basic EPS is computed by dividing net lossattributable to common shareholders by the weighted average common sharesoutstanding without including any potentially dilutive securities.  Diluted EPS is computed by dividing the netloss for the period by the weighted average common shares outstanding plus,when their effect is dilutive, common stock equivalents.

 

Potentially dilutivesecurities, which have been excluded from the determination of diluted earningsper share because their effect would be anti-dilutive, are as follows:

** **
| Series A Convertible Preferred                   |   | 2,400,000 |   |
|--------------------------------------------------|--------|-----------|--------|
| Series B  Convertible Preferred                  |   | 1,550,000 |   |
| Series C  Convertible Preferred                  |   | 411,000   |   |
| Warrants                                         |   | 45,000    |   |
| Options                                          |   | 220,000   |   |
| Total  potentially anti-dilutive shares excluded |   | 4,626,000 |   |

 

In April 2005, all of theSeries A and B preferred shareholders converted their shares into commonshares.  Also in April, PRB’sregistration statement was declared effective by the Securities and ExchangeCommission and the Company sold 2,300,000 shares of common stock in its initialpublic offering (“IPO”).  These shareswill be included in subsequent calculations of EPS.  In conjunction with its IPO, PRB issued200,000 warrants to the underwriters of the Company’s IPO and at an April 2005meeting the Board of Directors approved the issuance of 170,000 options underthe PRB Equity Compensation Plan.  Theseissuances are potentially dilutive securities.

 

RecentAccounting Pronouncements

 

In December 2004, the Financial AccountingStandards Board (“FASB”) issued SFAS No. 123R (revised 2004), *“Share-Based Payment”.* SFAS No. 123R replaced SFAS No. 123 and superseded APB 25.  SFAS No. 123R will require compensation costrelated to share-based payment transactions to be recognized in financialstatements.  As permitted by SFAS No.123, the Company elected to follow the guidance of APB 25, which allowedcompanies to use the intrinsic value method of accounting to value theirshare-based payment transactions with employees.  Based on this method, the Company did notrecognize compensation expense in its financials statements as the stockoptions granted had an exercise price equal to the fair market value of theunderlying common stock on the date of the grant.  SFAS No. 123R requires measurement of thecost of share-based payment transactions to employees at the fair value of theaward on the grant date and recognition of expense over the requisite serviceor vesting period.  SFAS No. 123Rrequires implementation using a modified version of prospective application,under which compensation expense for the unvested portion of previously grantedawards and all new awards will be recognized on or after the date of adoption.  SFAS No. 123R also allows companies to adoptSFAS No. 123R by restating previously issued financial statements, basing theamounts on the expense previously calculated and reported in their pro formafootnote disclosures required under SFAS No. 123.  The Company has not decided which adoptionmethod will be used. The provisions of SFAS No. 123R will be adopted by theCompany effective January 1, 2006. The effect of the adoption of SFAS No. 123Ris expected to be comparable to that disclosed on a pro forma basis as a resultof applying the current fair value recognition provisions of SFAS No. 123.

 

9

----

 

**PRB GAS TRANSPORTATION, INC.**

**Notes to Unaudited Financial Statements**

**March 31, 2005**

 

 

In March 2005, the SEC issued Staff AccountingBulletin (“SAB”) No. 107 which expressed the views of the SECregarding the interaction between SFAS No. 123(R) and certain SEC rulesand regulations. SAB No. 107 provides guidance related to the valuation ofshare-based payment arrangements for public companies, including assumptionssuch as expected volatility and expected term. In April 2005, the SECapproved a rule that delayed the effective date of SFAS No. 123(R) forpublic companies. As a result, SFAS No. 123(R) will be effective for PRBon January 1, 2006.

 

**Note 2 –Restatement of Results**

 

The Company acquired a contracteffective August 2004.  During June 2005the Company determined that it had incorrectly invoiced this customer for theperiod August 2004 through April 2005. The original invoices for this period did not take into account that theagreement includes a minimum contract billing provision.  The Company invoiced the customer for thedifference between the original invoices and the corrected invoices in June2005.  As the Company was not able todetermine if the $304 thousand that was invoiced to the customer during June2005 was going to be paid or was collectible, the Company had not previouslyrecognized the $304 thousand as revenue.  The customer paid the Company for the differencedue (approximately $304 thousand) during December 2005, including approximately$105 thousand in respect to the three months ended March 31, 2005, and $162thousand in respect to the year ended December 31, 2004. Accordingly, theCompany has restated its financial statements as summarized below.

 

The effect of this restatementon the Company’s previously issued Statement of Operations, Balance Sheets, Statementsof Cash Flows and Stockholder’s Equity is as follows:

 
| ** **                             | ** ** | **For the three months ended March 31, 2005** | ** ** |
|----------------------------------------|------------|----------------------------------------------------|------------|
| ** **                             | ** ** | **As reported**                                    | ** ** | **Adjustment** | ** ** | **As restated** | ** ** |
| Revenue                                |       | $                                                  | 735,607    |   | $ | 105,450 |   | $ | 841,057 |   |
| Net loss                               |       | $                                                  | (335,619   | ) | $ | 105,450 |   | $ | (230,169 | ) |
| Net loss  attributable to common stock |       | $                                                  | (517,964   | ) | $ | 105,450 |   | $ | (412,514 | ) |
| Net loss per  share basic and diluted  |       | $                                                  | (0.65      | ) | $ | 0.13 |   | $ | (0.52 | ) |

 

 
| ** **           | ** ** | **For the period ending** | ** ** |
|----------------------|------------|---------------------------|------------|
| ** **           | ** ** | **March 31, 2005**   | ** ** | **December 31, 2004** | ** ** |
| ** **           | ** ** | **As reported**           | ** ** | **Adjustment** | ** ** | **As restated** | ** ** | **As reported** | ** ** | **Adjustment** | ** ** | **As restated** | ** ** |
| Accounts  receivable |       | $                         | 288,730    |   | $ | 267,900 |   | $ | 556,630 |   | $ | 261,090 |   | $ | 162,450 |   | $ | 423,540 |   |
| Accumulated  deficit |       | $                         | (1,148,607 | ) | $ | 267,900 |   | $ | (880,707 | ) | $ | (812,988 | ) | $ | 162,450 |   | $ | (650,538 | ) |

 

Other line items in thesestatements such as operating income, current assets, etc. have been restatedsimilarly.  The aforementioned restatementadjustments do not affect total cash flows provided by operating activities,net cash used in investing activities and net cash provided by (used in)financing activities, although certain components of cash flows provided byoperating activities have been restated.

 

**Note 3 –  Property, Equipment and Contracts**

 

Property andequipment consists of the following at March 31, 2005 and December 31, 2004:

 
| ** **                      | ** ** | **Useful Lives** | ** ** | **March 31, 2005** | ** ** | **December 31, 2004** | ** ** |
|---------------------------------|------------|------------------|------------|--------------------|------------|-----------------------|------------|
| Compressor  sites               |       | 10 years         |       | $                  | 2,102,081  |                  | $          | 2,027,209 |   |
| Pipelines  and interconnect     |       | 10 years         |       | 6,563,598          |       | 6,563,598             |       |
| Computer  equipment             |       | 3 years          |       | 15,968             |       | 10,585                |       |
| Office  furniture and equipment |       | 7 years          |       | 34,748             |       | 30,363                |       |
|                            |       |             |       | 8,716,395          |       | 8,631,755             |       |
| Less  accumulated depreciation  |       |             |       | (714,194           | )          | (495,552              | )          |
|                            |       |             |       | $                  | 8,002,201  |                  | $          | 8,136,203 |   |

 

10

----

 

**PRB GAS TRANSPORTATION, INC.**

**Notes to Unaudited Financial Statements**

**March 31, 2005**

 

Depreciation expense related to these assetstotaled $218,642 and $56,914 for the three months ended March 31, 2005 and2004, respectively.

 

Contracts valued at $2,300,651 are beingamortized over 10 years which is the estimated life of the contracts and/or thefields underlying the contracts. Amortization expense related to these contracts was $57,516 and $25,521for the three months ended March 31, 2005 and 2004, respectively.

 

**Note 4 -Asset Retirement Obligation**

 

Property andequipment includes platforms to hold the leased compressors at the Company’sTOP gas gathering facilities. The Company is legally required to dismantlethese compressor platforms at the end of their useful lives.  In accordance with SFAS No. 143, “*Accounting for Asset Retirement Obligations*,*”* the Company recognized the fair value of a liability foran asset retirement obligation (“ARO”) in the amount of $60,004.  The Company capitalized that cost as part ofthe carrying amount of the compressor site which is depreciated over theestimated life of the compressors’ use. The following table describes all changes to the Company’s assetretirement obligation liability during the three months ended March 31, 2005and 2004:

 
| ** **                                        | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------------|------------|----------|------------|----------|------------|
| Asset  retirement obligation, beginning of period |       | $        | 64,804     |     | $          | — |   |
| Acquisition  of TOP assets                        |       | —   |       | 60,004   |       |
| Accretion  expense                                |       | 1,296    |       | 1,200    |       |
|                                              |       |     |       |     |       |
| Asset  retirement obligation, end of period       |       | $        | 66,100     |     | $          | 61,204 |   |

 

The Company has not yetrecorded an asset retirement obligation relating to obligations under certainof the surface use agreements purchased from BPE because a reasonable estimateof the useful lives of the underlying assets cannot currently be made.  The Company will periodically reviewavailable information and record an ARO in the period that a reasonableestimate of the fair market value of the liability can be made.

 

**Note 5 –Income Taxes**

 

The Company has not recorded atax benefit for the current period as the realization is not expected to belikely during the year. The benefit is also not expected to be realizable as adeferred tax asset at year end as the Company anticipates recording a fullvaluation allowance for all deferred tax assets, except to the extent ofoffsetting reversals of expected deferred tax liabilities.

 

**Note 6 –Notes Payable**

 

On December 14, 2004, theCompany signed a promissory note with the Bank of Oklahoma (“BOK”) for a$1,750,000 revolving line of credit that was due on the earlier of March 31,2005 or upon funding of the Company’s IPO. Accrued interest, calculated atprime, was due monthly. The interest rate at March 31, 2005 was 5.75%.  The note was secured by the Company’s gasgathering assets, associated contracts and a $1,000,000 certificate of depositpledged by a preferred shareholder.  Asof March 31, 2005, the outstanding balance of the note was $1,500,000. On March28, 2005, the Company signed a modification to the note extending the maturitydate of the note to May 31, 2005.

 

On April 13, 2005, the Companydrew down an additional $50,000 on the line of credit for a total outstandingbalance of $1,550,000.

 

11

----

 

**PRB GAS TRANSPORTATION, INC.**

**Notes to Unaudited Financial Statements**

**March 31, 2005**

 

On April 15, 2005, the Companyrepaid the $1,550,000 outstanding balance on the note and accrued interestof  $3,703 in full.

 

**Note 7 –Commitmentsand Contingencies**

 

ShareholderPledge of Certificate of Deposit

 

On December 14, 2004, apreferred shareholder (“Pledgor”) pledged a certificate of deposit in theamount of $1,000,000 as collateral for the BOK line of credit, as discussedabove.  The Company paid the shareholdera monthly fee of 0.529% of the collateral value for this pledge.  For the three months ended March 31, 2005,the Company has accrued fees of $15,658 to the Pledgor.

 

On April 15, 2005, uponrepayment of the line of credit outstanding balance, the certificate of depositwas returned to the Pledgor by the BOK.

 

Gas Gatheringand Transportation Contracts - *TOP*

 

Included in the TOP acquisitionwere three gas gathering contracts and a gas transportation contract.  Following is a description of thesecontracts.

 

The Company assumed a gas gathering contractthat was effective in October 2001 to gather and deliver gas for $0.89 perthousand cubic feet (“Mcf”) until such time as the Company has received a totalof 4.5 billion cubic feet (“BCF”) of gas from the shipper.  Thereafter, the transportation fee will bereduced $0.05 for every 5 BCF of gas received. The first threshold was reached in June 2004 and accordingly the ratewas reduced to $0.84 per Mcf effective July 1, 2004. The Company estimates thatthe next threshold will not be reached for at least 10 years. The contractremains in effect as long as the Company’s gathering facility remainsprofitable.  In the event the contract isunprofitable for the Company, the Company may terminate the contract with 30days written notice.  Revenue generatedunder this contract during the three months ended March  31, 2005 and 2004 was approximately $67,110and $201,425, respectively.  The amountsearned under this contract were classified as related party revenue in 2004 asthey were received from a company whose majority shareholder was a shareholderof PRB until September 30, 2004.

 

The Company assumed a 10-year gas gatheringcontract that was effective in September 2002 to gather and deliver gas for anunrelated third party for $0.58 per Mcf until such time as the shipper hasdelivered 2 Bcf.  Thereafter thegathering fee will be reduced to $0.52. The Company estimates that this threshold will be reached in mid2005.  After the initial term, eitherparty may terminate the contract with 30 days written notice.  Revenue generated under this contract duringthe three months ended March 31, 2005 and 2004 was approximately $63,950 and$127,900, respectively. The amounts earned under this contract were classifiedas related party revenue in 2004 as they were received from a company whosemajority shareholder was a shareholder of PRB until September 30, 2004.

 

The Company assumed a 10-year gas gatheringcontract that was effective in November 2003 to gather and deliver gas for$0.55 per Mcf.   After the initial term,either party may terminate the contract with 30 days written notice.  The producer behind this contract iscurrently directing its gas to another gatherer.  Revenue generated under this contract duringthe three months ended March 31, 2005 and 2004 was approximately $1,870 and$69,600, respectively.

 

The Companyassumed a 10-year gas transportation contract with an unrelated thirdparty, Bear Paw Energy, LLC that was effective in September 2001.  BPE transports the Company’s customers’ gasfor $0.14 per Mcf.  The Company purchasedcertain assets from BPE effective August 1, 2004.

 

12

----

 

**PRB GAS TRANSPORTATION, INC.**

**Notes to Unaudited Financial Statements**

**March 31, 2005**

 

GasGathering and Transportation Contracts - *BPE*

 

Included inthe BPE acquisition were twelve gas gathering contracts.  Below is a description of these contracts:

 

The Companyassumed four gas gathering contracts that are solely volume-based.  All of the contracts are for the life ofproduction, currently estimated to be 10 years, with prices of $0.37 per Mcf,$0.43 per Mcf and $0.539 per Mcf (two contracts currently billed together).  Revenue generated under these contractsduring the three months ended March 31, 2005 was $6,535, $22,267 and $49,116,respectively.

 

The Companyassumed a gas transportation contract which expired in September 2004 butcontinues to be billed under the old contract rate of $0.04 per Mcf until thecontract is renegotiated.  Revenuegenerated under this contract during the three months ended March 31, 2005 was$8,436.

 

The Companyassumed eight gas gathering contracts which have gathering rates that are basedon both volume and compression used on the system.  One of these contracts includes a monthlyminimum billing provision.  All contractsare for the life of production, currently estimated to be 10 years.  Gathering fees for these eight contracts havetwo major components: 1) volume is measured from a central gathering point tothe applicable delivery points and customers are charged a rate of $0.12 perMcf; and 2) a compression fee is charged for each compressor through which theowner’s gas flows.  The owner is chargedbased on allocated volumes multiplied by the corresponding compressionrate.  As of March 31, 2005, there weresix screw compressors billed at $11,000 each and two recip compressors billedat $40,000 each.  One of the eightcontracts is subject to an additional fee based on volume from the wellhead tothe central gathering point at a rate of $0.12 per Mcf.  Revenue generated under these eight contractsduring the three months ended March 31, 2005 was $516,321.

 

PossibleRescission of Series C Convertible Preferred Stock Sale

 

In December 2004, the Companyreceived $1,233,000 from the sale of 411,000 shares of Series C ConvertiblePreferred stock.  The Company paid nocash or other commissions or finders’ fees in connection with this offering. Inthe view of the Securities and Exchange Commission, this placement might nothave been eligible for an exemption from registration   under the Securities Act of 1933.  In the absence of such an exemption,investors could bring suit against the Company to rescind their stockpurchases, in which event the Company could be liable for rescission paymentsto these investors of up to $1,233,000, exclusive of interest and costs.

 

**Note 8 -Stockholders’ Equity**

 

Capital Stock

 

The Company is authorized toissue 50,000,000 shares of $0.001 par value capital stock.  There are 40,000,000 shares designated ascommon stock and 4,361,000 shares designated as preferred stock.  Capital stock of 5,639,000 remainsundesignated.  The Board of Directors hasdesignated three series of preferred stock. Series A 10% Convertible Preferred Stock (“Series A”) is entitled to a10% dividend payable quarterly, Series B 5% Convertible Preferred Stock (“SeriesB”) is entitled to a 5% dividend payable quarterly and Series C ConvertiblePreferred Stock (“Series C”) is not entitled to dividends.  All rights and preferences of Series A and SeriesB shareholders are equal. The rights and preferences of Series C shareholdersare equal with the exception of electing members of the board of directors andbeing subordinate to the Series A and B shareholders upon liquidation. (Seediscussion in next paragraph.)  In theevent of any liquidation, preferred shareholders are entitled to be paid, priorand in preference to any payments or distributions to common.

 

13

----

 

**PRB GAS TRANSPORTATION, INC.**

**Notes to Unaudited Financial Statements**

**March 31, 2005**

 

 

shareholders, an amount equalto the original purchase price of the stock, plus all accrued and unpaidcumulative dividends thereon.

 

All preferred shareholders havethe right to convert to an equal number of shares of common stock.  If the shares are not converted within 90days of the Company’s IPO, the dividend rate is reduced by 50%.  Each holder of Series A, Series B and SeriesC stock has voting rights and powers equal to the voting rights and powers ofthe holders of common stock and shall be entitled to the number of votes equalto the number of whole shares of common stock into which such shares could beconverted.   Series A and Series B Preferredshareholders are entitled as a class to elect not less than sixty percent ofthe Company’s directors.

 

In January 2004, the Companysold 800,000 shares of common stock to its Chief Executive Officer (“CEO”) for$10,000 and 800,000 shares of common stock to an individual who is a member ofTOP for $10,000.  On September 30, 2004,the Company repurchased 800,000 of its common shares from the individual who isa member of TOP for a total of $800,000 or $1.00 per share.

 

In January 2004, the Companyissued 2,400,000 shares of Series A at a price of $2.083 per share resulting inproceeds of approximately $4,987,000, net of offering costs of approximately$13,000.  The Series A SecuritiesPurchase agreement contained provisions granting the Series A shareholders theright to buy back some or all of the common shares issued above if certainconditions occur.  For the common sharesheld by the Company’s CEO, the buyback provision is tied to his length ofemployment. At March 31, 2005, 200,000 shares were still subject to thisprovision.  For the common shares held bythe member of TOP, the buyback provision was related to performance.  These 800,000 shares were purchased by theCompany in September 2004 as discussed earlier. In April 2005, all of theSeries A preferred shareholders converted their shares into common stock.

 

In May 2004, the Company issued1,550,000 shares of Series B at a price of $3.00 per share resulting inproceeds of approximately $4,640,600, net of offering costs of approximately$9,400. In April 2005, all of the Series B preferred shareholders convertedtheir shares into common stock.

 

In December 2004, the Companyissued 411,000 shares of Series C at a price of $3.00 per share resulting inproceeds of approximately $1,231,300, net of offering costs of approximately$1,700.  The Company’s chief executiveofficer and his wife purchased 163,500 shares in this offering.  The Company’s president and vice president offinance purchased 3,000 and 5,000 shares in this offering, respectively.

 

Pursuant to EITF 98-5, *“Accountingfor Convertible Securities With Beneficial Conversion Features or ContingentlyAdjustable Conversion Ratios”,*the issuance of the Series C sharesresulted in a beneficial conversion (deemed dividend and deemed compensation) sincethe shares were issued at less than estimated fair market value.  The Company recorded a deemed dividend of$586,750, deemed compensation of $440,750 for shares sold to officers and otherinterested parties and a deemed contribution of capital of $1,027,500 as aresult of the issuance of the Series C shares for an amount less than $5.50 pershare (the Company’s intended IPO price), which is the estimated fair marketvalue.

 

Dividends

 

Both the Series A and Series B shares havedividend rights which state that dividends will accrue from the date of issueuntil paid, whether or not earned or declared. At March 31, 2005, the Company had accrued $104,167 and $28,736 fordividends payable on the Series A and Series B shares, respectively.  These dividends were paid subsequent to March31, 2005.  As all of the Series A and Bpreferred shareholders converted to common shares in April 2005, finaldividends were paid through the date of conversion.

 

14

----

 

**PRB GAS TRANSPORTATION, INC.**

**Notes to Unaudited Financial Statements**

**March 31, 2005**

 

Initial PublicOffering

 

On April 12, 2005, theCompany’s registration statement on Form S-1 was declared effective by theSecurities and Exchange Commission and the Company’s stock began trading on theAmerican Stock Exchange under the trading symbol **PRB**.  The Company sold 2,300,000 shares of commonstock,  including 300,000 shares pursuantto the underwriter’s exercise of its over-allotment option.  In conjunction with the offering, holders ofSeries A and Series B preferred stock converted their shares into an equalnumber of registered common shares.  TheCompany received proceeds of $11,273,100 net of underwriter’s discounts,commissions and expenses at closing on April 15, 2005.  Additional offering costs are still beingcalculated and totaled $357,278 at March 31, 2005.

 

The Company entered into an underwritingagreement on April 12, 2005.   Theagreement called for the underwriter to purchase the shares on a firmcommitment basis at an 8% discount to the offering price.  The Company’s underwriter also received a 3%non-accountable expense allowance of the aggregate offering price of the sharesoffered, excluding the 300,000 over-allotment shares. At the closing of theunderwriting, the Company sold to the underwriter warrants to purchase 200,000shares of common stock at a price of $0.0001 per warrant.  The warrants have an exercise price of $6.875(125% of the initial offering price) and are exercisable for four years fromthe first anniversary of their issuance.

 

**Note 9 –Subsequent Events**

 

In May 2005, the Company entered into a 63 month lease for 4,768 squarefeet of office space beginning on the later of August 1, 2005 or the date thatthe build out of the space is substantially completed.  The lease calls for monthly payments of baserent beginning in month four of the lease term and, in years subsequent to thefirst year, a proportionate share of increases in operating expenses and realestate taxes over PRB’s proportionate share of the first year’s real estatetaxes and operating expenses.  If PRBdefaults under the terms and conditions of the lease, the three monthconditional rent abatement will be fully due and payable. The base rent for thefirst nine months is based on an annual payment of $16 per square foot andincreases $0.50 per year through the term of the lease.

 

15

----

 

**Item2.  Management’s Discussion and Analysis of Financial Condition andResults of Operations.**

 

This quarterly reportincludes forward-looking statements. All statements other than statements ofhistorical facts contained herein, including statements regarding our futurefinancial position, business strategy and plans and objectives of managementfor future operations, are forward-looking statements. The words “believe,” “may,”“will,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “plan,” “expect”and similar expressions, as they relate to us, are intended to identifyforward-looking statements. We have based these forward-looking statementslargely on our current expectations and projections about future events andfinancial trends that we believe may affect our financial condition, results ofoperations, business strategy and financial needs. These forward-lookingstatements are subject to a number of risks, uncertainties and assumptionsdescribed in “Risk Factors” and elsewhere in this report.

 

Other sections of this reportmay include additional factors which could adversely affect our business andfinancial performance. Moreover, we operate in a very competitive and rapidlychanging environment. New risk factors emerge from time to time and it is notpossible for our management to predict all risk factors, nor can we assess theimpact of all factors on our business or the extent to which any factor, orcombination of factors, may cause actual results to differ materially fromthose contained in any forward-looking statements.

 

We undertake no obligation toupdate publicly or revise any forward-looking statements. You should not relyupon forward-looking statements as predictions of future events or performance.We cannot assure you that the events and circumstances reflected in theforward-looking statements will be achieved or occur. Although we believe thatthe expectations reflected in the forward-looking statements are reasonable, wecannot guarantee future results, levels of activity, performance orachievements.

 

You should read the followingdiscussion in conjunction with our unaudited financial statements and the notesthereto and other financial information appearing elsewhere in this document.

 

This reportcontains our restated unaudited financial statements for the period endingMarch 31, 2005.  During June 2005 wedetermined that we had incorrectly invoiced a customer for the period August2004 through April 2005. This customer was acquired as part of our Bear PawEnergy, LLC (“BPE”) acquisition as described below.  The original invoices in respect to thiscustomer for this period did not take into account that the agreement includesa minimum contract billing provision.  Weinvoiced this customer for the difference between the original invoices and thecorrected invoices in June 2005.  Thecustomer paid the difference due (approximately $304 thousand) during December2005, including approximately $105 thousand in respect to the three monthsended March 31, 2005. As we were not able to determine if the $304 thousandthat was invoiced to the customer during June 2005 was going to be paid or wascollectible, we had not previously recognized the $304 thousand as revenue. Foradditional information see Note 2 — Restatement of Results in Item 1 of thisreport.

 

**Overview**

 

Weown and operate natural gas gathering systems in the Powder River Basin ofWyoming.  We commenced operations inJanuary 2004 upon our acquisition of certain operating assets of TOP Gathering,LLC (“TOP”).  In August 2004 we acquiredcertain operating assets of BPE that are located in the same area of Wyoming asthe TOP assets.  These assets include twogathering systems, two delivery lines and related land leases and gas gatheringand transportation agreements.  We chargea fee for gathering, compressing and dehydrating natural gas.  Our gathering systems collect gas at a producer’swellhead or at a collection point and deliver it to a transmission line ownedby a third party.  To date we have nottaken ownership of gas that we gather.

 

Naturalgas wells in the Powder River Basin area typically experience sharp declines inproduction volume in the first several years of production.  Production then stabilizes and declines moreratably over a gas well’s average life of approximately eight to 10 years.  The majority of the wells serviced by our TOPand Bear Paw gathering systems have reached a stable decline phase ofproduction.  We believe that undevelopedreserves in the fields serviced by these systems may provide additionalproduction that could offset future declines and possibly exceed current gasproduction.

 

Weplan to expand our present operations by:

•                  enhancing the present gathering systemsthrough operating efficiencies and expanding to servicing additional wells withinthese systems;

16

----

 

•                  designing and building new gathering systems;

•                  acquiring existing gathering systems;  and

•                  acquiring working interests in properties inareas where there are opportunities to build new gathering systems.

 

Wecurrently have no agreements for the design of new systems or the acquisition ofexisting systems.  In general, ouracquisition and building criteria focus on the estimated recoverable reservesremaining behind a system and the likelihood of the producers’ continueddevelopment of those reserves.

 

OnApril 12, 2005, we completed our initial public offering of 2,300,000 shares ofcommon stock (including the underwriter’s over-allotment option of 300,000shares) at $5.50 per share and commenced trading on the American Stock Exchangeunder the trading symbol ‘PRB.’  Wereceived proceeds of $11,273,100 net of underwriter’s discounts, commissionsand expenses at closing on April 15, 2005. Additional offering costs are still being calculated and totaled$357,278 at March 31, 2005.

 

Alsoin April 2005, all of our Series A and B preferred shareholders converted their3,950,000 shares of preferred stock into an equal number of shares of commonstock.  We intend to file a registrationstatement on Form S-1 to register the common shares underlying our Series Cconvertible stock.

 

AtMay 21, 2005, we have 7,050,000 shares of common stock outstanding.

 

**FinancialOperations Overview**

 

Our systems gather natural gas for independent natural gas companies inthe Powder River Basin area of Wyoming. Our commercial operations commenced in January 2004 with the TOPacquisition.  We expanded our commercialoperations in August 2004 with the Bear Paw acquisition.

 

***Nature of revenue*** Theamount of revenue we generate will primarily depend on the level of the fees wecharge for gathering and the amount of throughput in our pipelines.  One of our contracts includes a monthlyminimum billing provision.  Gatheringfees are determined by negotiation with the producers or shippersinvolved.  Our fees are not regulated byany governmental authority.  To date, we havenot taken ownership of the gas that we gather.

 

As of March 31, 2005, we have 13 customers, one of which represent 10%or more of our revenues for the three months ended March 31, 2005.   Someof our customers may be highly leveraged and subject to their own operating andregulatory risks.  If either of these keycustomers default on their obligations to us, our financial results would beadversely affected.

 

Wehave two types of gathering contracts.  Sevenof our contracts are currently on a volume only basis where we charge a set feeper thousand cubic feet, or Mcf, of gas gathered. One of these contractsincludes a minimum monthly billing provision. The rates for these contracts vary from approximately $0.37 per Mcf to$0.70 per Mcf, with those below $0.53 per Mcf accounting for less than 3.1% ofour revenues for the three months ended March 31, 2005.  One of the producers covered by this type ofcontract is currently directing its gas to another gathering system.  The balance of our gathering contracts are acombination of a $0.12 per Mcf fee based on volume and an additional fee foreach compressor used on the system. These compression fees are allocated to each producer on the systembased on its individual usage volumes and the total usage volumes of gaspassing through the system.  In March2005 the gathering fees under this type of contract ranged from approximately$0.73 per Mcf to $0.84 per Mcf.  Thesefees will vary monthly depending on the producers’ individual production andthe system’s total throughput.  Amountsearned under two of these contracts were classified as related party revenue in2004 as they were received from a company whose majority shareholder was ashareholder of PRB until September 30, 2004.

 

Twoof our contracts have thresholds which provide for a reduction in rates.  We assumed a gas gathering contract thatcommenced in October 2001 to gather and deliver gas for a related party for$0.89 per Mcf until such time as we received a total of 4.5 billion cubic feet,or Bcf, of gas from the shipper. Thereafter, the transportation fee will be reduced $0.05 for every 5 Bcfof gas received.  The first threshold wasreached in June 2004 and accordingly the rate was reduced to $0.84 per Mcfeffective July 1, 2004. We estimate that the next threshold will not be reachedfor at least 10 years. The contract remains in effect as long as our gatheringfacility remains profitable.  In theevent the contract is unprofitable for us, we may terminate the contract with30 days written notice.  Revenuesgenerated under this contract during the three months ended March 31, 2005 were$67,111.

 

17

----

 

Inaddition, we assumed a 10-year gas gathering contract commencing in September2002 to gather and deliver gas for an unrelated third party for $0.58 per Mcfuntil such time as the shipper has delivered two Bcf.  Thereafter, the gathering fee will be reducedto $0.52 per Mcf.  We estimate that thisthreshold will be reached in mid-2005. After the initial term, either party may terminate the contract with 30days written notice.  Revenues generatedunder this contract during the three months ended March 31, 2005 were $63,952.

 

Gas gathering through put in our systems is affected by the decline rateof the producers’ natural gas reserves. The effect of this decline rate can be offset by extension of thegathering system to additional fields and our customers’ further development oftheir fields.  If a decline in demand fornatural gas leads to reduced maintenance and development by our customers, itmay adversely affect their production and our throughput. The throughput in oursystems is not materially affected by seasonality.

 

***Operating expense ***Operatingexpenses include compression, operating agreement expense, site supervisioncosts, maintenance and operating supplies, property taxes, insurance, land useand surface rights payments and contract services, all of which are relativelyfixed costs. Operating expenses also include transportation fees paid to otherswhich vary with the throughput on our gathering lines.

 

***Depreciation and amortization expense**** *Depreciation andamortization expense relates principally to the depreciation of the gatheringsystems and amortization of related contracts. These assets are depreciated or amortized over estimated useful lives.

 

***General and administrative expense ***General and administrative expense includes compensation expense,professional fees and corporate overhead. We expect that currently and in thenear future these costs as a percentage of revenue will be higher than desireddue to our only recently commencing operations, but as revenue increases weexpect these costs to fall within industry ranges.

 

***Interest expense ***At March31, 2005, we had a note payable to the Bank of Oklahoma under a line of creditin the amount of**** **$1,500,000.  Interest was payable monthly at a fluctuatinginterest rate at the JPMorgan Chase Bank prime rate per annum.  The annual interest rate was 5.75% at March31, 2005. This bank line of credit matured the earlier of May 31, 2005 orwithin three days following the funding of the initial public offering and wassecured by all of our gathering assets and a pledge of a $1,000,000 certificateof deposit by a preferred stockholder. In consideration for this $1,000,000 pledge, we agreed to pay thepreferred stockholder a monthly fee of 0.529% until the bank line of credit wasretired and the pledge was released.

 

Followingthe payment of the bank line of credit in full in April 2005, the bank releasedtheir security interest in our gathering assets and the $1,000,000 certificateof deposit pledged by a preferred stockholder.

 

We intend to utilize commercial financing whenavailable to support our acquisition and development efforts although we haveno such debt at this time.  Interest raterisk exists principally with respect to any future indebtedness that willlikely bear interest at floating rates.

 

**CriticalAccounting Policies**

 

Ourdiscussion and analysis of our financial condition and results of operationsare based upon financial statements which have been prepared in accordance withaccounting principles generally accepted in the United States. The preparationof these financial statements requires management to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenues andexpenses, and related disclosure of contingent assets and liabilities as of thedate of the financial statements. Actual results may differ from theseestimates under different assumptions or conditions. We consider the followingpolicies to be the most critical to understanding the judgments that areinvolved and the uncertainties that could impact our results of operations,financial condition and cash flows.

 

18

----

 

***Revenue recognition***

 

We recognize revenue in the period that the gas gathering andtransportation services are provided. Our gas gathering and transportation contracts specify the rate that canbe charged on a basis of cents per thousand cubic feet or Mcf of naturalgas.  Each contract has a separatelynegotiated rate and terms may vary. One of our contracts includes a monthlyminimum billing provision. Certain of our contracts include separate chargesfor compression in addition to a transportation fee.  Our revenues will increase or decrease inproportion to gas volume delivered over our system. There are measurementpoints throughout each gathering system which enable the gas to be accuratelymeasured and allocated back to either different operators or wells.

 

***Long-lived assets***

 

Wecalculate depreciation and amortization based on estimated useful lives andsalvage values of our assets. When assets are placed into service, we makeestimates with respect to their useful lives that we believe are reasonable.However, factors such as competition, regulation or environmental matters couldcause us to change our estimates, thus impacting the future calculation ofdepreciation and amortization. We evaluate long-lived assets for potentialimpairment by identifying whether indicators of impairment exist and, if so,assessing whether the long-lived assets are recoverable from estimated futureundiscounted cash flows. The actual amount of impairment loss, if any, to berecorded is equal to the amount by which a long-lived asset’s carrying valueexceeds its fair value. Estimates of future undiscounted cash flows and fairvalue of assets require subjective assumptions with regard to future operatingresults and actual results could differ from those estimates. We recorded noimpairments of long-lived assets during the three months ended March 31, 2005.

 

***Abandonment liability***

 

We followStatement of Financial Accounting Standards (“SFAS”) No. 143, *“Accounting for Asset Retirement Obligations”.*  The estimated fair value of the future costsassociated with dismantlement, abandonment and restoration of facilities wasrecorded as of the effective date of the TOP acquisition.  The net estimated costs were discounted topresent values using a risk adjusted rate over the estimated economic life ofthe compressor site.  Such costs were capitalizedas part of the cost of the related asset and amortized.  The associated liability is classified as along-term liability and is adjusted when circumstances change and for theaccretion of expense which is recorded as a component of depreciation andamortization.  We have not yet recordedan asset retirement obligation in conjunction with the assets acquired fromBear Paw because sufficient information to make a reasonable estimate of thefair value of the liability is not available.

 

***Stock-based compensation***

 

Weaccount for employee stock options using the intrinsic value method inaccordance with Accounting Principles Board Opinion No. 25, *Accounting for Stock Issued to Employees*, and relatedinterpretations, and provide pro forma disclosures of net income (loss) as if afair value method had been applied in measuring compensation expense. Stockcompensation expense, which is a non-cash charge, is measured as the excess, ifany, of the fair value of our underlying common stock at the date of grant overthe amount an employee must pay to acquire such stock. This compensation costis amortized over the related vesting periods, generally four years, using anaccelerated method.  See “Recent AccountingPronouncements” in the accompanying unaudited financial statements.

 

***Contingencies***

 

Inthe future, we may be subject to adverse proceedings, lawsuits and other claimsrelated to environmental, labor, product and other matters. We will be requiredto assess the likelihood of any adverse judgments or outcomes of these mattersas well as potential ranges of probable losses. A determination of the amountof reserves required, if any, for these contingencies is made after carefulanalysis of each individual issue. The required reserves may change in thefuture due to developments in each matter or changes in approach such as achange in settlement strategy in dealing with these potential matters.

 

19

----

 

**Resultsof operations**

 

***Three months ended March 31, 2005(unaudited) compared to the three months ended March 31, 2004 (unaudited)***

 

***Revenues******* Gas gathering revenues were $841,057 for thethree months ended March 31, 2005 compared with $398,911 for the three monthsended March 31, 2004, an increase of $442,146 or 111%.  Revenues from the BearPaw systems of $708,125 are included in the revenues for the three months endedMarch 31, 2005 and offset the decrease of $265,979, or 66.6%, experienced for theTOP system.  The TOP decrease wasprimarily attributable to lower natural gas volumes processed through thegathering system by existing producers and the redirection of one of ourproducer’s gas to another gathering system.

 

***Operating expenses*** Operatingexpenses totaled $490,792 for the three months ended March 31, 2005 comparedwith $218,770 for the three months ended March 31, 2004, an increase of $272,022,or 124%. Bear Paw operating expenses of $326,411 are included in operatingexpenses for the three months ended March 31, 2005.  The decrease for this period excluding theBear Paw expenses is $54,390, or 24.8%. Approximately $20,290 of this decreaseis attributable to a reduction in the number of compressors leased andapproximately $49,260 is due to a decrease in gas transportation fees paidbased on the lower gas volumes.  Thesedecreases were offset by an increase in property tax of $13,125. We reduced thenumber of compressors utilized due to the lower natural gas volumes beingproduced.

 

***Depreciation and amortization*** Depreciation and amortization totaled $277,454for the three months ended March 31, 2005 compared with $83,636 for the threemonths ended March 31, 2004, an increase of $193,818, or 232%.  Bear Paw depreciation and amortization expensesof $191,164 are included in depreciation and amortization expenses for thethree months ended March 31, 2005.  Theactual increase for this period excluding the Bear Paw expenses is $2,654, or 3.1%,which is attributable to depreciation on office furniture and equipment.

 

***General and administrative expenses***** **General andadministrative expenses totaled $261,502 for the three months ended March 31,2005 compared with $88,955 for the three months ended March 31, 2004, anincrease of $172,547, or 194%. The increase was primarily due to the hiring ofprofessional management and staff that were necessary for operations.  Approximately $106,298 of the increase isattributable to payroll and related expense and approximately $36,150 isattributable to professional and consulting fees.  There was also an increase in rent ofapproximately $8,400 and an increase in fees related to being a public companyof $8,250.

 

**Generaltrends and outlook**

 

Weexpect our business to continue to be affected by the following key trends. Ourexpectations are based on assumptions made by us and information currentlyavailable to us. To the extent our underlying assumptions about orinterpretations of available information prove to be incorrect, ourexpectations may vary materially from actual results.

 

***U.S. Gas Supply and Outlook.***** Webelieve that the relatively high levels of demand for natural gas by both theresidential and commercial markets will continue to result in steady orincreasing natural gas prices which in turn will drive drilling activity.  In 2003, the Bureau of Land Managementforecasts that over 80,000 new wells will be drilled in the Rocky Mountainregion by end of 2008.  There areapproximately 15,000 authorized drilling permits to be issued by the BLM in theState of Wyoming.  We believe that anincrease in U.S. drilling activity and additional sources of supply such asliquefied natural gas, or LNG, imports will be required for the natural gasindustry to meet the expected increased demand for, and compensate for theslowing production of, natural gas in the United States.

 

***Rising Interest Rate Environment*****.**  Thecredit markets recently have experienced 50-year record lows in interestrates.  As the overall economystrengthens, it is likely that monetary policy will tighten further, resultingin higher interest rates to counter possible inflation.  This could affect our ability to access thedebt capital markets to pay for acquisitions. In addition, interest rates on future credit facilities and debtofferings could be higher than current levels, causing our financing costs toincrease accordingly. Although this could limit our ability to raise funds inthe debt capital markets, we expect to remain competitive with respect toacquisitions and capital projects, as our competitors would face similarcircumstances.

 

20

----

 

**Liquidityand capital resources**

 

***Cash flows and capital expenditures***

 

At March 31, 2005, cash and cash equivalentstotaled $101,043 and we had a working capital deficit of $1,475,272. Since ourinception, we have principally financed our operating cash flow needs throughprivate offerings of our equity securities.

 

On April 12, 2005, wecompleted our initial public offering of 2,300,000 shares of common stock at$5.50 per share and our shares commenced trading on the American Stock Exchangeunder the trading symbol ‘PRB.’  TheCompany received proceeds of $11,273,100 net of underwriter’s discounts,commissions and expenses at closing on April 15, 2005.  Additional costs of the offering are stillbeing calculated and totaled $357,278 at March 31, 2005

 

We utilized the proceeds toretire the $1,550,000 balance outstanding under our $1,750,000 bank line ofcredit.  The bank line of credit wascancelled upon payment in full and the security interest in our gatheringassets and the $1,000,000 certificate of deposit pledged by a preferredstockholder was released.

 

We believe that the proceedsfrom this offering will be sufficient to fund operations for at least the next18 months.  We intend to utilize debtfinancing for development commitments when economically feasible andavailable.  While we currently have noplans for any future issuance of equity securities other than in conjunctionwith compensation plans, warrants and conversion of our preferred stock, we mayissue equity or debt securities to finance growth transactions that may occurin the course of our business operations.

 

***Cash flow provided by (used in) operations*** Cash provided by operating activities was $141,919for the three months ended March 31, 2005. The net loss from operating activities of $230,169 was reduced by $276,158in depreciation and amortization, $1,296 in accretion expense and an increaseof $273,947 in accounts payable and accrued expenses and other current liabilities.This was offset by an increase of approximately $182,380 in prepaid expensesand accounts receivable.

 

Cash used in operatingactivities was $298,324 for the three months ended March 31, 2004.  The net income from operating activities of $11,213was increased by $82,436 in depreciation and amortization and $1,200 ofaccretion expense which do not use cash and decreased by $393,173 due to a netincrease in accounts receivable, prepaid expenses and other assets overaccounts payable and other accrued liabilities.

 

***Cash flow from investing activities*** Cashused in investing activities was $87,691 for the three months ended March 31,2005  The funds were principally used foradditions to the TOP system and for purchasing office furniture and computerequipment.

 

Cash used in investingactivities was $1,941,375 for the three months ended March 31, 2004.  The funds were used for the acquisition ofthe TOP system.

 

***Cash flow from financing activities*** Cash used in financing activities was $273,335for the three months ended March 31, 2005. The Company paid $183,125 in preferred dividends and incurred $90,210 ofdeferred costs related to our initial public offering.

 

Cash provided by financingactivities was $5,007,025 for the three months ended March 31, 2004.  We received $4,987,025 in net proceeds fromthe sale of our Series A preferred stock and $20,000 from the sale of commonstock.

 

**Preferredstock dividends**

 

All ofour Series A 10% preferred stock and Series B 5% preferred stockholdersconverted to common stock on April 11, 2005. On April 15, 2005 we paid $155,364 in accrued dividends up to theconversion date.

 

21

----

 

**Item 3.  Quantitative and Qualitative Disclosure AboutMarket Risk.**

 

Weare exposed to certain market risks inherent within the intrastate natural gasgathering industry.  We intend to manageour operations in a manner designed to minimize our exposure to such marketrisks.

 

***Credit risk***

 

Creditrisk is the risk of loss resulting from non-performance of contractualobligations by a customer or joint venture partner. A substantial portion ofour accounts receivable is expected to be with customers in the energy industryand are subject to normal industry credit risk. We intend to assess thefinancial strength of our customers through regular credit reviews in order tominimize the risk of non-payment.

 

***Market risk***

 

Marketrisk is the risk of loss arising from adverse changes in market rates andprices. Because we do not own the natural gas that is shipped on our gatheringlines or processed in our facilities, we are not directly exposed to naturalgas commodity price risk.

 

***Interest rate risk***

 

Interestrate risk will exist principally with respect to any future indebtedness thatbears interest at floating rates. At March31, 2005 we had $1,500,000 in bank indebtedness with a fluctuatinginterest rate equal to the JPMorgan Chase Bank prime rate.  This line of credit was paid in full andcancelled in April 2005.

 

22

----

 

**Item 4.  Controls and Procedures**

* *

TheCompany maintains disclosure controls and procedures that are designed toensure that information required to be disclosed in the reports under theSecurities Exchange Act of 1934, as amended (“Exchange Act”) are communicated,processed, summarized and reported within the time periods specified in the SEC’srules and forms. At the end of the Company’s first quarter of 2005, as requiredby Rules 13a-15 and 15d-15 of the Exchange Act, an evaluation was carriedout under the supervision and with the participation of the Company’smanagement, including the Chief Executive Officer and the Principal Financialand Accounting Officer, of the effectiveness of the design and operation ofdisclosure controls and procedures (as defined in Rule 13a-15(e) under theExchange Act). Based upon that evaluation, the Chief Executive Officer and thePrincipal Financial and Accounting Officer concluded that the design andoperation of these disclosure controls and procedures were effective as of thatdate. No changes in internal controls over financial reporting identified inconnection with its evaluation (as required by Rules 13a-15(d) and15d-15(d) of the Exchange Act) occurred during the first quarter of 2005 thatmaterially affected, or were reasonably likely to materially affect, theCompany’s internal control over financial reporting.

 

Althoughthe evaluation did not detect any material weaknesses or significantdeficiencies in the Company’s system of internal accounting controls overfinancial reporting, management has identified certain potential**deficiencies in its level of staffing,and inherent limitations in its electronic data processing software. TheCompany intends to add additional financial and accounting personnel during thesecond or third quarter of 2005 to address this resource issue. The Companywill also assess the viability of enhancing or replacing its electronic dataprocessing software in 2005.

 

23

----

 

**PART II -OTHER INFORMATION**

** **

**Item 1.        Legal Proceedings.**

 

None.

** **

**Item 2.        Changesin Securities and Use of Proceeds.**

** **

**(f) ****Use of Proceeds**

 

Our registration statement on Form S-1 (file number 333-120129) became effective and our common stock commenced trading on the American Stock Exchange on April 12, 2005. A total of 2,300,000 shares of common stock were registered for the account of PRB for an aggregate offering price of $12,650,000.  All of these securities were sold.  A total of 3,995,000 shares of common stock were registered for the account of selling shareholders.  PRB will receive no proceeds from the sale of these shares.  The managing underwriter was Gilford Securities Incorporated.

 

Actual expenses incurred in connection with the issuance anddistribution of the above securities during the period from the effective datethrough May 23, 2005 were $1,896,816,  representing underwriting discounts andcommissions of $1,012,000, underwriter expenses of $389,900 and other expensesof $494,916 (inclusive of deferred offering costs of $357,278 at March 31,2005).

 

All payments were direct or indirect to others.  No payments were direct or indirect paymentsto:  i) directors, officers or generalpartners of the Company or its associates; ii) persons owning 10% or more ofany class of equity security; or iii) affiliates of the Company.

 

Net proceeds from the offering were $10,753,184 after expenses andincluding the proceeds from the underwriter’s exercise of its over-allotment option.Additional expenses may be received in the next few weeks and will be disclosedin subsequent filings.

 

For the quarter ended March 31, 2005 no proceeds were received oravailable for use.  As of April 30, 2005 $1,553,703was used to repay the $1,550,000 outstanding on the line of credit from theBank of Oklahoma plus accrued interest.

 

No use of proceeds has involved direct or indirect payments to: i)directors, officers or general partners of the Company or its associates; ii)persons owning 10% or more of any class of equity security; or iii) affiliatesof the Company.  The unutilized portionof the proceeds is presently being invested in highly liquid, short-terminvestments.

 

**Item 3.        Defaults Upon Senior Securities.**

 

None.

 

**Item 4****.       ****Submissionof Matters to a Vote of Security Holders.**

 

None.

 

**Item 5****.       ****OtherInformation.**

 

None.

 

24

----

 

**Item 6.        Exhibitsand Reports on Form 8-K. **

 
| **Exhibits** | ** ** | ** **                                                   |
|--------------|------------|--------------------------------------------------------------|
| 3.1          |       | Amended Articles of  Incorporation of the Registrant(1)      |
| 3.2          |       | Amended By-laws of the  Registrant(2)                        |
| 3.3          |       | Series A Preferred  Stock Certificate of Designation(1) |
| 3.4          |       | Series B Preferred  Stock Certificate of Designation(1) |
| 3.5          |       | Series C Preferred Stock  Certificate of Designation (2)     |
| 10.1         |       | Equity Compensation Plan  (1)                                |
| 31           |       | Rule  13a-14(a)/15d-14(a) Certification (3)                  |
| 32           |       | Section  1350 Certification. (3)                             |

 

----

(1)  Filed as an exhibit to form S-1 filed onNovember 1, 2004 and incorporated by reference herein.

(2)  Filed as an exhibit to Form S-1/A filed onJanuary 28, 2005 and incorporated by reference herein.

(3)  Filed herewith.

 

(b) Reports on Form 8-K:

 

None

 

25

----

 

**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934, PRBGas Transportation,  Inc. has duly causedthis report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
|                  | **PRB Gas Transportation, Inc.** |
|-----------------------|----------------------------------|
|                  | (Registrant)                     |
|                  |                             |
| Date: March 22,  2006 | **/s/****William P. Brand, Jr.** |   |
|                  | William P.  Brand, Jr.           |
|                  | Vice  President — Finance   |

 

26

----

 

**EXHIBITINDEX**

 
| **Exhibits** | ** ** | ** **                                                    |
|--------------|------------|---------------------------------------------------------------|
| 3.1          |       | Amended Articles of  Incorporation of the Registrant (1)      |
| 3.2          |       | By-laws of the Registrant  (2)                                |
| 3.3          |       | Series A Preferred  Stock Certificate of Designation (1) |
| 3.4          |       | Series B Preferred  Stock Certificate of Designation (1) |
| 3.5          |       | Series C Preferred  Stock Certificate of Designation (2) |
| 10.1         |       | Equity Compensation Plan  (1)                                 |
| 31           |       | Rule 13a-14(a)/15d-14(a)  Certification (3)                   |
| 32           |       | Section 1350 Certification.  (3)                              |

 

----

*(1)*Filed as an exhibit to form S-1 filed on November 1, 2004 andincorporated by reference herein.

 

*(2)*Filed as an exhibit to Form S-1/A filed on January 28, 2005 andincorporated by reference herein.

 

*(3)*Filed herewith.

 

 

----