**UNITEDSTATES****SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.20549**

**Form 10-Q**

**(MarkOne)**
| **x**                                                                                               | ** ** | **QUARTERLY REPORT PURSUANT TO   SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|-----------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                                                          | ** ** | ** **                                                                                                                        |
| **For the  quarterly period ended September 30, 2006**                                              |
| ** **                                                                                          |
| **Or**                                                                                              |
| ** **                                                                                          | ** ** | ** **                                                                                                                        |
| **o**                                                                                               | ** ** | **TRANSITION REPORT PURSUANT TO   SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                                                                          | ** ** | ** **                                                                                                                        |
| **For  the transition period from            to** |

 

**Commissionfile number 001-32471**

**PRBENERGY, INC.**

(Exact Name ofRegistrant as Specified in its Charter)

| **Nevada**                                |   | **20-0563497**       |
|-------------------------------------------|--------|----------------------|
| (State or Other  Jurisdiction             |   | (I.R.S. Employer     |
| of Incorporation  or Organization)        |   | Identification  No.) |
|                                      |   |                 |
| **1875  Lawrence Street, Suite 450**      |   | ** **           |
| **Denver,  CO**                           |   | **80202**            |
| (Address of  Principal Executive Offices) |   | (Zip Code)           |

 

TelephoneNumber: **(303) 308-1330**

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past90 days.     Yes x     No o

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer     Accelerated filer     Non-acceleratedfiler   x

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act). Yes o     No x

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date.

| Class                           | ** ** | **Outstanding as of November 10, 2006** |
|---------------------------------|------------|-----------------------------------------|
| Common Stock,  $0.001 par value |       | 7,351,994 Shares                        |

 

 

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**TABLEOF CONTENTS**
|                                      | ** ** | ** **                                                                                  | ** ** |
|--------------------------------------|------------|---------------------------------------------------------------------------------------------|------------|
|                                 |       |                                                                                        |
| PART I — Financial  Information |       | 1                                                                                           |
| Item 1.                         |       | Financial Statements                                                                        |       | 1 |
| Item 2.                         |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |       | 12 |
| Item 3.                         |       | Quantitative  and Qualitative Disclosures About Market Risk                                 |       | 17 |
| Item 4.                         |       | Controls and  Procedures                                                                    |       | 17 |
| PART  II — Other Information    |       | 19                                                                                          |
| Item 1.                         |       | Legal Proceedings                                                                           |       | 19 |
| Item  1A.                            |       | Risk  Factors                                                                               |       | 19 |
| Item 2.                         |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                |       | 19 |
| Item 3.                         |       | Defaults  Upon Senior Securities                                                            |       | 19 |
| Item 4.                         |       | Submission  of Matters to a Vote of Security Holders                                        |       | 19 |
| Item 5.                         |       | Other Information                                                                           |       | 19 |
| Item 6.                         |       | Exhibits                                                                                    |       | 20 |
|                                 |       | Signatures                                                                                  |       | 22 |
|                                      |            |                                                                                             |            |  |  |

 

When we refer to “PRB,” “theCompany,” “us,” “we,” or “our,” we are describing PRB Energy, Inc. and itssubsidiaries.

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**PART I — FINANCIAL INFORMATION**

**ITEM 1. FINANCIALSTATEMENTS**

**PRBENERGY, INC.**

**Consolidated Balance Sheets**

**(Inthousands, except share amounts)**
| ** **                                                                                                                                                                                                     | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                     | ** ** | **(Unaudited)**              | ** ** | ******                      | ** ** |
| **Assets**                                                                                                                                                                                                     | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Current assets:                                                                                                                                                                                                |       |                         |       |                        |       |
| Cash and cash  equivalents                                                                                                                                                                                     |       | $                            | 12,292     |                        | $          | 6,434 |   |
| Restricted cash                                                                                                                                                                                                |       | 3,039                        |       | —                      |       |
| Accounts  receivable                                                                                                                                                                                           |       | 1,490                        |       | 789                         |       |
| Inventory                                                                                                                                                                                                      |       | 929                          |       | 1,346                       |       |
| Prepaid expenses                                                                                                                                                                                               |       | 779                          |       | 194                         |       |
| **Total  current assets**                                                                                                                                                                                      | ** ** | **18,529**                   |       | 8,763                       |       |
| Oil and gas properties  - successful efforts method of accounting:                                                                                                                                             |       |                         |       |                        |       |
| Proved  properties                                                                                                                                                                                             |       | 5,542                        |       | 317                         |       |
| Unproved  leaseholds                                                                                                                                                                                           |       | 328                          |       | 136                         |       |
| Wells-in-progress                                                                                                                                                                                              |       | 4,781                        |       | 1,081                       |       |
| Total oil and  gas properties                                                                                                                                                                                  |       | 10,651                       |       | 1,534                       |       |
| Less:  accumulated depreciation, depletion and amortization                                                                                                                                                    |       | (376                         | )          | (3                          | )          |
| **Net oil  and gas properties**                                                                                                                                                                                | ** ** | **10,275**                   |       | 1,531                       |       |
| Gathering and other  property and equipment                                                                                                                                                                    |       | 9,437                        |       | 6,992                       |       |
| Less:  accumulated depreciation and amortization                                                                                                                                                               |       | (1,636                       | )          | (968                        | )          |
| **Net  gathering and other property and equipment**                                                                                                                                                            | ** ** | **7,801**                    |       | 6,024                       |       |
| Other non-current  assets:                                                                                                                                                                                     |       |                         |       |                        |       |
| Deferred debt  issuance costs                                                                                                                                                                                  |       | 1,143                        |       | —                      |       |
| Less:  accumulated amortization                                                                                                                                                                                |       | (267                         | )          | —                      |       |
| Net deferred  debt issuance costs                                                                                                                                                                              |       | 876                          |       | —                      |       |
| Other  non-current assets                                                                                                                                                                                      |       | 1,220                        |       | 1,122                       |       |
| **Total  other non-current assets**                                                                                                                                                                            | ** ** | **2,096**                    |       | 1,122                       |       |
| TOTAL ASSETS                                                                                                                                                                                                   | ** ** | **$**                        | **38,701** |                        | $          | 17,440 |   |
| ** **                                                                                                                                                                                                     | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| **Liabilities  and Stockholders’ Equity**                                                                                                                                                                 | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Current liabilities:                                                                                                                                                                                           |       |                         |       |                        |       |
| Accounts payable                                                                                                                                                                                               |       | $                            | 1,633      |                        | $          | 1,652 |   |
| Accrued expenses  and other current liabilities                                                                                                                                                                |       | 1,498                        |       | 107                         |       |
| Total current  liabilities                                                                                                                                                                                     |       | 3,131                        |       | 1,759                       |       |
| Subordinated  convertible notes and other debt, less current portion                                                                                                                                           |       | 21,975                       |       | 17                          |       |
| Other non-current  liabilities                                                                                                                                                                                 |       | 2,839                        |       | 407                         |       |
| **Total  liabilities**                                                                                                                                                                                         | ** ** | **27,945**                   |       | 2,183                       |       |
| Commitments and  Contingencies                                                                                                                                                                                 |       |                         |       |                        |       |
| Stockholders’ equity:                                                                                                                                                                                     |       |                         |       |                        |       |
| Capital,  50,000,000 shares authorized, par value $0.001, 5,639,000 shares  undesignated; Series C Convertible Preferred, 4,361,000 shares  authorized; 0 and 40,000 issued and outstanding, respectively |       | —                       |       |                        | *          |
| Common stock,  40,000,000 shares authorized; 8,261,894 issued; 7,471,894 and 7,431,894  outstanding, respectively                                                                                              |       | 8                            |       | 8                           |       |
| Treasury stock                                                                                                                                                                                                 |       | (800                         | )          | (800                        | )          |
| Additional  paid-in-capital                                                                                                                                                                                    |       | 21,902                       |       | 21,325                      |       |
| Accumulated  deficit                                                                                                                                                                                           |       | (10,354                      | )          | (5,276                      | )          |
| **Total  stockholders’ equity**                                                                                                                                                                           | ** ** | **10,756**                   |       | 15,257                      |       |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                                                | ** ** | **$**                        | **38,701** |                        | $          | 17,440 |   |

 

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***                      amounts lessthan one thousand

**               derivedfrom audited balance sheet at December 31, 2005

The accompanyingnotes are an integral part of these consolidated financial statements.

1

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**PRBENERGY, INC.**

**Consolidated Statements of Operations**

**(Inthousands, except share amounts)**

**(Unaudited)**
| ** **                                             | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                             | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                             | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues:                                              |       |                                                 |       |                                                |       |   |   |   |   |
| Gas gathering and processing                           |       | $                                                    | 314        |                                                | $          | 658 |   | $ | 1,592 |   | $ | 2,214 |   |
| Natural gas sales                                      |       | 776                                                  |       | —                                              |       | 882 |   | — |   |
| Other                                                  |       | 8                                                    |       | 66                                                  |       | 154 |   | 66 |   |
| Total revenues                                         |       | 1,098                                                |       | 724                                                 |       | 2,628 |   | 2,280 |   |
| Operating  expenses:                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Production taxes                                       |       | 88                                                   |       | —                                              |       | 104 |   | — |   |
| Gas gathering and processing                           |       | 425                                                  |       | 418                                                 |       | 1,681 |   | 1,293 |   |
| Natural gas lease operating                            |       | 580                                                  |       | —                                              |       | 737 |   | — |   |
| Depreciation, depletion, amortization and accretion    |       | 759                                                  |       | 281                                                 |       | 1,415 |   | 838 |   |
| General and administrative                             |       | 977                                                  |       | 584                                                 |       | 3,123 |   | 1,311 |   |
| Impairment and other expense                           |       | —                                               |       | 2,372                                               |       | 50 |   | 2,372 |   |
| Total operating expenses                               |       | 2,829                                                |       | 3,655                                               |       | 7,110 |   | 5,814 |   |
| Operating loss                                         |       | (1,731                                               | )          | (2,931                                              | )          | (4,482 | ) | (3,534 | ) |
| Other income  (expense):                               |       |                                                 |       |                                                |       |   |   |   |   |
| Interest and other income                              |       | 583                                                  |       | 63                                                  |       | 1,054 |   | 111 |   |
| Interest expense                                       |       | (618                                                 | )          | —                                              |       | (1,650 | ) | (49 | ) |
| Net loss                                               |       | (1,766                                               | )          | (2,868                                              | )          | (5,078 | ) | (3,472 | ) |
| Convertible  preferred stock dividends                 |       | —                                               |       | —                                              |       | — |   | (205 | ) |
| Net loss applicable to common stockholders             |       | $                                                    | (1,766     | )                                                   | $          | (2,868 | ) | $ | (5,078 | ) | $ | (3,677 | ) |
|                                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Net loss per  share — basic and diluted           |       | $                                                    | (0.24      | )                                                   | $          | (0.40 | ) | $ | (0.68 | ) | $ | (0.54 | ) |
|                                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Basic and diluted  weighted average shares outstanding |       | 7,471,894                                            |       | 7,160,050                                           |       | 7,458,708 |   | 6,805,621 |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

2

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**PRBENERGY, INC.**

**Consolidated Statements of Cash Flows**

**(Inthousands)**

**(Unaudited)**
| ** **                                                                                 | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                 | ** ** | **September 30,**          | ** ** |
| ** **                                                                                 | ** ** | **2006**                        | ** ** | **2005** | ** ** |
| Cash flows from  operating activities:                                                     |       |                            |       |   |   |
| Net loss                                                                                   |       | $                               | (5,078     | ) | $ | (3,472 | ) |
| Adjustments to reconcile net loss to net cash (used  in) provided by operating activities: |       |                            |       |   |   |
| Depreciation, depletion, amortization and accretion                                        |       | 1,465                           |       | 838 |   |
| Asset impairment charge                                                                    |       | —                          |       | 2,372 |   |
| Amortization of debt issuance costs                                                        |       | 267                             |       | — |   |
| Share-based compensation expense                                                           |       | 415                             |       | — |   |
| Warrants issued for services rendered                                                      |       | 70                              |       | — |   |
| Capitalized interest                                                                       |       | (77                             | )          | — |   |
| Gain on sale of gathering assets                                                           |       | (311                            | )          | — |   |
| Changes in assets and liabilities:                                                         |       |                            |       |   |   |
| Accounts receivable                                                                        |       | (701                            | )          | (1,082 | ) |
| Inventory                                                                                  |       | 417                             |       | — |   |
| Prepaid expenses                                                                           |       | (585                            | )          | (44 | ) |
| Other non-current assets                                                                   |       | (190                            | )          | (35 | ) |
| Accounts payable                                                                           |       | (19                             | )          | 1,012 |   |
| Accrued expenses and other current liabilities                                             |       | 947                             |       | 105 |   |
| Deferred Revenue                                                                           |       | 44                              |       | — |   |
| Other non-current liabilities                                                              |       | 261                             |       | — |   |
| Net cash used in operating activities                                                      |       | (3,075                          | )          | (306 | ) |
| Cash flows from  investing activities:                                                     |       |                            |       |   |   |
| Capital expenditures                                                                       |       | (4,362                          | )          | (584 | ) |
| Acquisition of natural gas properties and gathering  facilities                            |       | (4,922                          | )          | (608 | ) |
| Restricted cash related to future liabilities of  acquired properties                      |       | (3,039                          | )          | — |   |
| Sale of gathering assets                                                                   |       | 350                             |       | — |   |
| Net cash used in investing activities                                                      |       | (11,973                         | )          | (1,192 | ) |
| Cash flows from  financing activities:                                                     |       |                            |       |   |   |
| Proceeds from convertible notes                                                            |       | 21,965                          |       | — |   |
| Issuance costs related to convertible notes                                                |       | (1,051                          | )          | — |   |
| Proceeds from IPO, net of issuance costs                                                   |       | —                          |       | 11,007 |   |
| Borrowings under bank loan                                                                 |       | —                          |       | 50 |   |
| Repayment of proceeds from bank loan                                                       |       | —                          |       | (1,550 | ) |
| Dividends                                                                                  |       | —                          |       | (338 | ) |
| Repayment of term loan                                                                     |       | (8                              | )          | — |   |
| Net cash provided by financing activities                                                  |       | 20,906                          |       | 9,169 |   |
| Net increase in  cash                                                                      |       | 5,858                           |       | 7,671 |   |
| Cash—beginning  of period                                                             |       | 6,434                           |       | 320 |   |
| Cash—end of  period                                                                   |       | $                               | 12,292     |   | $ | 7,991 |   |
|                                                                                       |       |                            |       |   |   |
| Supplemental  disclosure of cash flow activity                                             |       |                            |       |   |   |
| Cash paid for interest                                                                     |       | $                               | 1,369      |   | $ | 49 |   |
| Supplemental schedule  for non-cash activity                                               |       |                            |       |   |   |
| Issuance of warrants in connection with public  offering                                   |       | —                          |       | $ | 571 |   |
| Issuance of warrants in connection with convertible  notes                                 |       | $                               | 92         |   | — |   |
| Conversion of Series A,B and C preferred stock                                             |       | —                          |       | $ | 4 |   |
| Capital remediation costs                                                                  |       | $                               | 1,056      |   | — |   |
| Asset retirement  obligations                                                              |       | $                               | 2,085      |   | — |   |

 

The accompanyingnotes are an integral part of these consolidated financial statements.

3

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**PRBENERGY, INC.**

**Notes to Consolidated Financial Statements**

**September30, 2006**

**(Unaudited)**

**Note 1—Description of Business, Basisof Presentation and Summary of Significant Accounting Policies**

***Description of Business***

PRB is anindependent energy company engaged in the acquisition, exploration, developmentand production of natural gas and oil. In addition, we provide gas gathering,processing and compression services for properties we operate and for thirdparty producers. PRB was initially formed under the name “PRB Transportation,Inc.” in December 2003, and was incorporated in the State of Nevada. On June14, 2006, PRB’s name was changed to “PRB Energy, Inc.” PRB’s common shares aretraded on the American Stock Exchange under the ticker symbol “PRB.” PRBconducts its primary business activities in Wyoming.  PRB operates through two wholly-ownedsubsidiaries, PRB Oil and Gas, Inc., an oil and gas exploration and productioncompany and PRB Gathering, Inc., a gathering and processing company.

***Basis of Presentation***

We have preparedthis Quarterly Report on Form 10-Q under the rules and regulations of theUnited States Securities and Exchange Commission (“SEC”). Because this is aninterim period filing presented using a condensed format, certain informationand footnote disclosures normally included in consolidated financial statementsprepared in accordance with accounting principles generally accepted in theUnited States of America have been condensed or omitted. These interimfinancial statements should be read in conjunction with the auditedconsolidated financial statements and the summary of significant accountingpolicies and notes thereto included in our 2005 Annual Report onForm 10-K.  During interim periods, we follow the same accountingpolicies outlined in our 2005 Annual Report on Form 10-K, Note 2 — Summary ofSignificant Accounting Policies. The condensed consolidated financialstatements as of September 30, 2006, and for the three and nine months endedSeptember 30, 2006 and 2005, are unaudited. We derived the condensedconsolidated balance sheet as of December 31, 2005, from the auditedbalance sheet filed in our 2005 Annual Report on Form 10-K. Certainreclassifications have been made to the 2005 unaudited condensed consolidatedfinancial statements to conform to the 2006 presentation. Suchreclassifications had no effect on the 2005 net loss. In the opinion ofmanagement, these interim financial statements contain all adjustments whichare of a normal, recurring nature to fairly present the financial position ofPRB as of September 30, 2006 and the results of our operations and cash flowsfor the nine months ended September 30, 2006 and 2005. Information for interimperiods may not be indicative of our results of operations for the entire year.

***Summary of Significant Accounting Policies***

*Use ofEstimates*

Management makesestimates and assumptions that affect the amounts reported in the financialstatements and the disclosures made in the accompanying notes. Some examples ofsuch estimates are the realizability of inventory, the appropriate levels ofvarious accruals including asset retirement obligations, determining theremaining economic lives and carrying values of property and equipment, oil andgas properties and other long-lived assets. In addition, we use assumptions toestimate the fair value of share-based compensation. See Share-BasedCompensation below and Note 5 - Equity Compensation Plan. We believe ourestimates and assumptions are reasonable; however, actual results may differ fromour estimates.

*Share-BasedCompensation*

Prior to ourJanuary 1, 2006 adoption of Financial Accounting Standards Board (“FASB”)Statement No. 123(R), “*Share-Based Payment*”(“SFAS No. 123(R)”), we accounted for share-based compensation using the intrinsicvalue method prescribed in Accounting Principles Board Opinion No. 25, “*Accounting for Stock Issued to Employees*”(“APB No. 25”) and related interpretations.  Accordingly, because thestock option grant price was equal to or greater than the respective marketprices of our common stock on the grant dates, no compensation expense wasrecognized for Company-issued stock options.  In accordance with Statementof Financial Accounting Standards (“SFAS”) No. 123, “*Accounting for Stock-based Compensation*” (“SFAS No. 123”)and SFAS No. 148,*  “Accounting for Stock-Based Compensation —Transition and Disclosure,”* we provided pro-forma net loss and net loss per share disclosures foreach period prior to the adoption of SFAS No. 123(R) as if we had applied the fairvalue-based method in measuring compensation expense for our share-basedcompensation plans.

4

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Effective January1, 2006, we adopted SFAS No. 123(R) using the modified prospective transitionmethod and, as a result, did not retroactively adjust results from priorperiods.  SFAS No. 123(R) requires that share-based compensation expensebe measured using estimates of the fair value of all share-based awards andapplies to new awards and to awards modified, repurchased or cancelled afterDecember 31, 2005, as well as to the unvested portion of awards outstanding asof January 1, 2006. Under the modified prospective transition method, we arerecognizing share-based compensation expense over the remaining vesting periodfor awards that were outstanding but unvested at January 1, 2006 and we arerecognizing share-based compensation expense for the fair value of all awardsgranted on or after January 1, 2006 as the awards vest. We apply theBlack-Scholes valuation model in determining the fair value of share-basedpayments to employees.  See Note 5 - Equity Compensation Plan for furtherdiscussion of share-based compensation.

*NetLoss Per Share*

We account forearnings (loss) per share (“EPS”) in accordance with SFAS No. 128, “*Earnings per Share*” (“SFAS No. 128”).Under SFAS No. 128, basic EPS is computed by dividing the net loss applicableto common stockholders by the weighted average common shares outstandingwithout including any potentially dilutive securities. Diluted EPS is computedby dividing the net loss applicable to common stockholders for the period bythe weighted average common shares outstanding plus, when their effect isdilutive, common stock equivalents.

Potentiallydilutive securities, which have been excluded from the determination of dilutedEPS because their effect would be anti-dilutive, are as follows:
| ** **                                  | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                  | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
|                                        |       |                                                |       |   |   |
| Series C  Convertible Preferred        |       | —                                              |       | 411,000 |   |
| Warrants                                    |       | 300,000                                             |       | 245,000 |   |
| Options                                     |       | 625,875                                             |       | 390,000 |   |
| Convertible  notes                          |       | 3,137,857                                           |       | — |   |
| Total potentially  dilutive shares excluded |       | 4,063,732                                           |       | 1,046,000 |   |

 

*Concentrationsof Credit Risk*

We grant credit inthe normal course of business to customers in the United States. Managementperiodically performs a credit analysis and monitors the financial condition ofour customers to reduce credit risk.  Management periodically reviewsaccounts receivable and reduces the carrying amount by a valuation allowancethat reflects management’s best estimate of the amount that may not becollectible.  Allowances for uncollectible accounts receivable are basedon information available and historical experience.  As of September 30,2006 and December 31, 2005, there were no allowances for uncollectible accountsreceivable.

Revenues fromcustomers which represented 10% or more of our sales for the three and ninemonths ended September 30, 2006 and 2005 were as follows:
| ** **                           | ** ** | **For the three months ended** | ** ** | **For the nine months ended** | ** ** |
|--------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                           | ** ** | **September 30,**                             | ** ** | **September 30,**                            | ** ** |
| **Customer**                         | ** ** | **2006**                                           | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                           | ** ** | **(% of total revenue)**            | ** ** | **(% of total revenue)**           | ** ** |
| ** **                           | ** ** | ** **                                         | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| A — Exploration and  production |       | 58.2                                               | %          | —                                            |       | 24.3 | % | — |   |
| B — Gathering and  Processing   |       | —                                             |       | 46.3                                              | %          | — |   | — |   |
| C — Gathering and  Processing   |       | 18.1                                               | %          | —                                            |       | 16.3 | % | — |   |
| D — Gathering and  Processing   |       | —                                             |       | —                                            |       | 24.0 | % | 51.7 | % |

 

5

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*Debt Issuance Costs*

 

We include debtissuance costs in other non-current assets.  These costs are associatedwith the senior subordinated convertible notes (“Notes”) we issued in March2006.  The remaining unamortized debt issuance costs at September 30, 2006were $876,000 and are being amortized using the effective interest rate methodover the life of the Notes.

**Note 2—Acquisitions and SignificantContracts**

***Acquisitions***

*Recluse gathering system*

In the firstquarter of 2006, we acquired two gas gathering systems in the Recluse area ofWyoming (together our “Recluse” gathering system) for approximately $1.5million. Also, in two separate transactions totaling $183,000, we acquired acombination of working interests ranging from 7.5% to 15% in the development ofapproximately 5,600 net acres in the Recluse and Gap areas that offer us theopportunity to expand both our exploration and production and gas gathering andprocessing activities.

On August 4, 2006,we closed an acquisition from Maverick Pipeline LLC of approximately 70 milesof gathering lines in the Recluse area which will provide additionalopportunities for expanding gathering services to producers in the 100,000acres surrounding the pipelines. The transaction was effective August 1, 2006,and the $428,000 purchase price was paid in cash.

*Pennaco wells*

On June 30, 2006,we acquired working interests in approximately 580 gross (529 net) coal-bedmethane wells on approximately 29,000 acres located in the Powder River Basinof Wyoming from Pennaco Energy, Inc. (“Pennaco”). The purchase price of theacquired interests was approximately $600,000 and the effective date was July1, 2006. As part of the purchase agreement, we issued a $3 million reducingletter of credit to the benefit of Pennaco to guarantee the funding of thefuture liability of the plugging costs of wells being purchased from Pennaco.The asset retirement obligation of these wells has been recorded on the balancesheet for $2 million based on the discounted present value of the futureliability, as further reflected in Note 3. The letter of credit iscollateralized by a $3 million certificate of deposit (“CD”), and is consideredrestricted cash for purposes of available working capital. The restrictedamount of the CD will be released at the same rate annually that the letter ofcredit is reduced (refer to management’s discussion on Liquidity and CapitalResources in the Management’s Discussion and Analysis section in this report).

Of the 580 grosswells acquired, fewer than 150 wells were commercially producing natural gas.We currently have approximately 220 wells on production and plan to bring anadditional 230 shut-in wells back on production, which will require additionalcapital expenditures. In this regard, an estimate of these capital expendituresby our technical staff of $1.5 million has been included in the 2006 capitalbudget and was accrued in oil and gas properties in the balance sheet.

*Sale of TOP gathering system*

As of September 1,2006 we sold certain gas gathering assets referred to as the TOP GatheringSystem to Arete Industries, Inc. for $330,000 in cash.  The net gain on the sale of $308,000 isreflected in Other Income in the September 30, 2006 financial statements.

***Significant Contracts***

*StormCat Agreement*

Effective January1, 2006, we entered into a gas gathering services agreement (“Agreement”) withStorm Cat, which requires Storm Cat to pay us gas gathering fees on specificminimum volumes of gas whether or not those volumes are delivered andtransported through our system. The Agreement has a 10-year term, of which thefirst five years are noncancelable. The Agreement requires Storm Cat to pay usa minimum of $972,000 in 2006 and an aggregate minimum of $3.1 million in gasgathering fees during the first three years of the Agreement.  The Agreement also provides for our gasgathering rates to decrease during the fourth and fifth years.

During the ninemonths ended September 30, 2006, we billed Storm Cat $420,000 in gas gatheringfees for actual volumes delivered. The Agreement allows for a cash true-uppayment at each year-end if the annual volume commitment under the Agreement isnot met. We recognize revenues based on our estimate of the average gasgathering rate during the noncancelable term of the Agreement. Accordingly, wedeferred $44,000 of gas gathering fees as a non-current liability on ourbalance sheet at September 30, 2006.

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*Rocky Mountain Gas Agreement*

 

OnMarch 20, 2006, PRB terminated a Farmout and Development Agreement datedAugust 1, 2005 (“Farmout Agreement”) with Enterra Energy Trust’s wholly-ownedsubsidiary Rocky Mountain Gas, Inc. (“RMG”). We are also the designated field operator under a Joint OperatingAgreement (“JOA”) with RMG for certain coal-bed methane properties in Wyomingand Montana that are covered by the JOA. In February 2006, RMG executed 19 authorizations for expenditure todrill and complete the Moyer coal pilot wells. After termination of the FarmoutAgreement, PRB, as operator under the JOA, issued a cash call to RMG for RMG’sshare of the estimated well costs for nine wells. In addition, aftertermination of the Farmout Agreement, RMG requested its full working interestin all wells drilled after the termination date. As of March 31, 2006, theoutstanding amount due from RMG was $713,000, which we classified as an accountreceivable.

PRBdid not receive payment from RMG for the well costs as required under the JOAand issued a notice of default to RMG. The default was not cured within the period prescribed by the JOA and,under the JOA, RMG’s interest was relinquished to PRB until the proceeds fromthe nine Moyer wells equal 300% of the capital expenditures by PRB on RMG’sbehalf.  As a result, we reclassified the$713,000 account receivable from RMG as additional costs of oil and gasproperties on our June 30, 2006 balance sheet.

OnJune 22, 2006, RMG filed an arbitration demand against PRB, asserting that thearea of mutual interest provision in the terminated Farmout Agreement continuesuntil August 2007 and, therefore, includes the Pennaco acquisition and that weshould pay 100% of the costs of drilling the nine Moyer wells for a 50% workinginterest.  On August 22, 2006, PRB deniedRMG’s arbitration claims, and asserted counterclaims against RMG.  The arbitration is scheduled for February2007.  At this time, we cannot predictthe outcome of the arbitration.

Wealso agreed upon termination of the Farmout Agreement to continue to providemanagement services until June 30, 2006. As of June 30, 2006, we had a receivable due from RMG of $386,000 formanagement services rendered and certain other amounts due from RMG. RMGdisputed the amounts due to us. In July 2006, PRB and RMG entered into aninterim agreement under which, among other things, RMG paid us $175,000 of theamount due at June 30, 2006.  Theremainder of the amount due is to be settled after a review is jointlycompleted by RMG and PRB of the transactions covered by the agreement.  It is anticipated that this review will becompleted by December 31, 2006.  Anyremaining disputed expenses will be presented for resolution at the February2007 arbitration.  No reserve againstthis remaining balance has been recorded at September 30, 2006, as we believethe balance to be fully collectible.

**Note 3—Asset Retirement Obligations**

We recognize anestimated liability for future costs associated with abandoning our propertyand equipment used in our gas gathering operations as well as for oil and gasproperties. A liability for the fair value of an asset retirement obligation isestablished when the long-lived asset is acquired, constructed and orcompleted, with a corresponding increase in the carrying value of the asset. Wedepreciate the asset retirement obligations associated with our property andequipment, and deplete the amounts recorded in respect to our oil and gasproperties, and recognize accretion expense, all over the estimated usefullives of the assets and or remaining recoverable reserves.

We estimate ourfuture retirement obligations based on our experience, management estimates andregulatory requirements. We discount the estimated future obligations using anestimated credit adjusted risk-free rate at the time the obligation is incurredor revised. Historically this rate has been estimated at 8% to 10%. Theestimated obligations may be revised due to changes in our gas gathering systemconfiguration, changes in estimates and or changes in regulations.

A reconciliationof our asset retirement obligation liability for the nine months endedSeptember 30, 2006 and 2005, is as follows:
| ** **                                        | ** ** | **Nine Months Ended**  | ** ** |
|---------------------------------------------------|------------|----------------------------------|------------|
| ** **                                        | ** ** | **September 30, 2006** | ** ** | **September 30, 2005** | ** ** |
| ** **                                        | ** ** | **(In thousands)**          | ** ** |
|                                              |       |                             |       |   |   |
| Asset retirement  obligation, beginning of period |       | $                                | 387        |   | $ | 65 |   |
| Acquisition of  Recluse system                    |       | 70                               |       | — |   |
| Acquisition of  Proved properties                 |       | 27                               |       | — |   |
| Acquisition of  Pennaco wells                     |       | 2,000                            |       | — |   |
| Acquisition of  True                              |       | 170                              |       | — |   |
| Accretion                                         |       | 189                              |       | 4 |   |
| Reclamation  expenditures                         |       | (69                              | )          | — |   |
| Asset retirement  obligation, end of period       |       | $                                | 2,774      |   | $ | 69 |   |

 

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**Note 4—Borrowings**

 

As of September30, 2006 and December 31, 2005, our borrowings consisted of the following:
| ** **                             | ** ** | **September 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|----------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                             | ** ** | **(In thousands)**          | ** ** |
|                                   |       |                             |       |                            |       |
| Senior  subordinated convertible notes |       | $                                | 21,965     |                            | $          | — |   |
| Other term loans                       |       | 20                               |       | 27                              |       |
|                                   |       | 21,985                           |       | 27                              |       |
| Less current  portion                  |       | (10                              | )          | (10                             | )          |
| Total long-term  borrowings            |       | $                                | 21,975     |                            | $          | 17 |   |

 

*SeniorSubordinated Convertible Notes*

In March 2006, weissued a total principal amount of approximately $22 million in Notes in aprivate placement. The Notes are secured by certain gas gathering assets ownedby PRB and mature 30 months from the date of issue. The Notes bear interest ata fixed rate of 10% per annum, payable quarterly in arrears beginning onMarch 15, 2006. A registration statement applicable to the shares ofcommon stock underlying the Notes was filed in May 2006 and declared effectiveon June 21, 2006. The Notes do not contain any beneficial conversion features.

Debt issuancecosts in the amount of $1.051 million, excluding the value of warrantsissued, were deferred as other non-current assets and are being amortizedas interest expense using the effective interest method over the 30-month lifeof each Note. For the nine months ended September 30, 2006, we incurred $1.460million in total interest expense applicable to the Notes.

Note holders havethe right to convert the Notes to common stock at a conversion price of $7.00per share, which is subject to certain anti-dilution adjustments. In the eventthat our common stock trades at $14.00 per share or above for 10 consecutivedays, we have a call provision that allows us to retire the Notes upon 10 daysprior written notice by paying in cash the principal amount and any accrued butunpaid interest. In addition, we are prohibited from declaring or paying cashdividends on our common stock during the period that any Note is outstandingand unpaid.

We followSFAS No. 133, and EITF 00-19, “*Accountingfor Derivative Financial Instruments Index to, and Potentially Settled in, aCompany’s Own Stock* “ and related pronouncements. We have evaluatedthe conversion feature embedded in our senior subordinated convertible notesand the liquidated damages provision in the related Registration RightsAgreement and have determined that the entire amount of these securities isproperly classified as long-term debt and are not accounted for as derivativeson our consolidated balance sheet at September 30, 2006.

**Note 5—Equity Compensation Plan**

We have an EquityCompensation Plan (“Option Plan”) that permits us to grant options to purchaseshares of our common stock to eligible employees, contractors and non-employeemembers of the Board of Directors. In accordance with our Option Plan, wereserve shares equal to 10% of our issued and outstanding common stock forissuance under the Option Plan. Our compensation committee may grant options onsuch terms, including vesting and payment forms, as it deems appropriate in itsdiscretion; however, no option may be exercised more than 10 years after itsgrant, and the purchase price may not be less than 100% of the fair marketvalue of our common stock on the date of grant.

All optionsgranted to date under the Option Plan have been granted at exercise pricesequal to or greater than the respective market prices of our common stock onthe grant dates. There were 121,314 shares available for grant under the OptionPlan as of September 30, 2006.

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The followingtable summarizes activity for options:
| ** **                    | ** ** | **Nine Months Ended  September 30, 2006** | ** ** | **Nine Months Ended  September 30, 2005** | ** ** |
|-------------------------------|------------|---------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| ** **                    | ** ** | **Number of  Shares**                                    | ** ** | **Weighted Avg.  Exercise Price**                   | ** ** | **Number of  Shares** | ** ** | **Weighted Avg.  Exercise Price** | ** ** |
|                          |       |                                                          |       |                                                          |       |   |   |   |   |
| Outstanding at  January 1,    |       | 463,250                                                       |       | $                                                             | 6.74       |   | 220,000 |   | $ | 5.50 |   |
| Granted                       |       | 314,250                                                       |       | 6.08                                                          |       | 230,000 |   | 7.86 |   |
| Forfeited                     |       | (151,625                                                      | )          | 7.21                                                          |       | (37,500 | ) | 6.17 |   |
| Exercised                     |       | —                                                        |       | —                                                        |       | — |   | — |   |
| Outstanding at  September 30, |       | 625,875                                                       |       | $                                                             | 6.40       |   | 412,500 |   | $ | 6.75 |   |
| Exercisable at  September 30, |       | 296,875                                                       |       | $                                                             | 6.46       |   | 181,250 |   | $ | 6.38 |   |

 

The fair value ofeach option granted is estimated on the date of grant using the Black-Scholesoption pricing model. The weighted average fair value of options granted duringthe nine months ended September 30, 2006 was $3.68.  The weighted average remaining contractuallife for the options outstanding at September 30, 2006 is 6.7years.   The weighted average remaining contractual life for theoptions exercisable at September 30, 2006 is 2.4 years.

The Black-Scholesoption valuation model was developed for use in estimating the fair value oftraded options that have no vesting restrictions and are fully transferable. Inaddition, option valuation models incorporate highly subjective assumptionsincluding the expected stock price volatility. Our stock options havecharacteristics significantly different from those of traded options and, aschanges in the subjective input assumptions can materially affect the fairvalue estimate, it is management’s opinion that the valuations as determined bythe existing models are different from the value that the options would realizeif traded in the market.

***Adoption of SFAS No. 123(R)***

PRB adopted SFASNo. 123(R) on January 1, 2006 using the modified prospectivetransition method as described in SFAS No. 123(R). Under this method,compensation expense is recognized over the vesting period for all share-basedpayments granted after the effective date and for all unvested awards grantedprior to the effective date. In accordance with SFAS No. 123(R), priorperiod amounts were not restated. During the nine months ended September 30, 2006,we recorded share-based compensation expense of $415,000, which was recognizedin general and administrative expense with a corresponding credit to additionalpaid-in-capital. Of the $415,000, $102,000 was related to unvested optionsgranted prior to January 1, 2006. Compensation expense related to unvestedoptions granted, but not yet recognized as of September 30, 2006, was $928,000.We expect to recognize this compensation expense over the vesting period. The weighted-average vesting period is 2.4 years.

Prior to theeffective date of SFAS No. 123R, our option plan transactions were accountedfor under APB No. 25 and related interpretations. Pro-forma informationregarding the impact of total share-based compensation on net loss and net lossper share for prior periods is required by SFAS No. 123. Such pro-formainformation, determined as if we had accounted for our employee stock optionsunder the fair value method during the nine months ended September 30, 2005, isillustrated in the following table:

 
| ** **                                                                                                                                  | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                                                  | ** ** | **September 30, 2005** | ** ** | **September 30, 2005** | ** ** |
| ** **                                                                                                                                  | ** ** | **(In thousands)**          | ** ** | **(In thousands)**          | ** ** |
| Net loss applicable to  common stockholders:                                                                                                |       |                             |       |                             |       |
| As reported                                                                                                                                 |       | $                                | (2,868     | )                                | $          | (3,677 | ) |
| Less: Total  share-based employee compensation expense determined under fair value-based  method for all awards, net of related tax effects |       | 49                               |       | 372                              |       |
| Pro-forma net loss                                                                                                                          |       | $                                | (2,917     | )                                | $          | (4,049 | ) |
|                                                                                                                                        |       |                             |       |                             |       |
| Net loss per share,  basic and diluted:                                                                                                     |       |                             |       |                             |       |
| As reported                                                                                                                                 |       | $                                | (.40       | )                                | $          | (.54 | ) |
|                                                                                                                                        |       |                             |       |                             |       |
| Pro-forma                                                                                                                                   |       | $                                | (.41       | )                                | $          | (.59 | ) |

 

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*Determining Fair Value*

 

*Valuationand Amortization Method.* We estimate the fair value of stockoptions granted using the Black-Scholes option valuation model. For optionsgranted before January 1, 2006, we amortize the fair value on an acceleratedbasis. For options granted on or after January 1, 2006, we amortize thefair value on a straight-line basis. All options are amortized over therequisite service periods of the awards, which are generally the vestingperiods.

*ExpectedTerm*. The expected term of options granted represents theperiod of time that they are expected to be outstanding. We estimated theexpected term of options granted using the simplified method in accordance withthe SEC’s Staff Accounting Bulletin No. 107.

*ExpectedVolatility*. Consistent with SFAS No. 123(R), we base ourexpectations about the future volatility of our stock using the weightedaverage volatilities of similar companies that operate in our industry, takinginto consideration stage of life cycle and size.

*Risk-FreeInterest Rate.* We base the risk-free interest rate that weuse in the Black-Scholes option valuation model on the implied yield in effectat the time of option grant on U.S. Treasury zero-coupon issues with equivalentremaining terms.

*Dividends.*We have never paid any cash dividends on our common stock and we do notanticipate paying any cash dividends in the foreseeable future. Consequently,we use an expected dividend yield of zero in the Black-Scholes option valuationmodel.

*Forfeitures.*SFAS No. 123(R) requires us to estimate forfeitures at the time of grantand revise those estimates in subsequent periods if actual forfeitures differfrom those estimates. We use historical data to estimate pre-vesting optionforfeitures and record share-based compensation expense only for those awardsthat are expected to vest. For purposes of calculating pro-forma informationunder SFAS No. 123, we accounted for forfeitures as they occurred.

We used thefollowing assumptions to estimate the fair value of options granted for thenine months ended September 30, 2006 and 2005:
| ** **                        | ** ** | **SFAS No. 123(R) Expense** | ** ** | **SFAS No. 123 Pro-Forma** | ** ** |
|-----------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                        | ** ** | **Nine Months Ended**            | ** ** | **Nine Months Ended**           | ** ** |
| ** **                        | ** ** | **September 30, 2006**           | ** ** | **September 30, 2005**          | ** ** |
|                              |       |                                       |       |                                      |       |
| Expected life of  options         |       | 2.4 — 6.7 years                       |       | 5 — 10 years                         |       |
| Expected  volatility              |       | 80                                         | %          | 25                                        | %          |
| Risk-free  interest rate          |       | 4.31 — 5.23                           | %          | 3.89 — 4.73                          | %          |
| Expected dividend yield  of stock |       | 0                                          | %          | 0                                         | %          |

 

**Note 6—Segment Information**

SFAS No. 131, “*Disclosures about Segments of an Enterprise andRelated Information*” (“SFAS No.131”) establishes standards for theway in which public companies disclose certain information about operatingsegments in their financial reports. Consistent with SFAS No. 131, we havedefined two reportable segments, described below, based on factors such as howwe manage operations and how the chief operating decision makers view results.We consider our chief executive officer and our chief operating officer as ourchief operating decision makers. During the third quarter of 2005, we entered intothe oil and gas exploration and production segment and began producing andselling natural gas during the fourth quarter of 2005.

***Gas Gathering and Processing Segment***

We own and operategas gathering and processing systems we acquired in 2004 and during the ninemonths ended September 30, 2006, as earlier described. We charge a fee to ourcustomers for these services based on volumes of gas transported, based on amonthly minimum fee and/or based on the level of compression services provided.We have acquired gas gathering contracts that include operating leases inrespect to surface-use rights that are cancelable in the event that gasgathering activities cease as a result of declining production. We also havecancelable purchase commitments with third party providers for future fieldoperations, equipment and maintenance activities.

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***Oil and GasExploration and Production Segment***

 

Beginning in thethird quarter of 2005, we commenced operations in the exploration andproduction segment. Our operations in this segment include exploring for,developing, producing and marketing natural gas from coal-bed methane wells.For the nine months ended September 30, 2006, our exploration and productionsegment operated in the Powder River Basin area of Wyoming.

Through amanagement services agreement with RMG, we earned management fee revenues thatwe have included under Corporate in the following table that details theperformance of our segments.  In March 2006, we elected to terminate themanagement services agreement; however, we agreed to continue to provideservices under the agreement through June 30, 2006.
| ** **                                             | ** ** | **Three Months Ended September 30, 2006** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                             | ** ** | **Gathering  and  Processing**                                     | ** ** | **Exploration  and  Production** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| ** **                                             | ** ** | **(In thousands)**                                            | ** ** |
| ** **                                             | ** ** | ** **                                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                                               |       | $                                                                  | 484        |   | $ | 776 |   | $ | (162 | ) | $ | 1,098 |   |
| Net income (loss)  attributable to common stockholders |       | $                                                                  | 57         |   | $ | 5 |   | $ | (1,828 | ) | $ | (1,766 | ) |

 
| ** **                                    | ** ** | **Nine Months Ended September 30, 2006** | ** ** |
|-----------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                    | ** ** | **Gathering  and  Processing**                                    | ** ** | **Exploration  and  Production** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| ** **                                    | ** ** | **(In thousands)**                                           | ** ** |
| ** **                                    | ** ** | ** **                                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                                      |       | $                                                                 | 1,908      |   | $ | 882 |   | $ | (162 | ) | $ | 2,628 |   |
| Net loss  attributable to common stockholders |       | $                                                                 | (363       | ) | $ | (515 | ) | $ | (4,200 | ) | $ | (5,078 | ) |
| Identifiable  assets:                         |       |                                                              |       |   |   |   |   |   |   |
| Property and  equipment, net                  |       | $                                                                 | 7,312      |   | — |   | $ | 489 |   | $ | 7,801 |   |
| Oil and gas  properties, net                  |       | —                                                            |       | $ | 10,275 |   | — |   | $ | 10,275 |   |
| Other non-current  assets                     |       | $                                                                 | 1,002      |   | — |   | $ | 218 |   | $ | 1,220 |   |

 

The majority ofour operations were in only one segment during the nine months ended September30, 2005 and our management reviewed the results of our operations as a singlesegment during that period.

**Note 7— Related Party Transactions**

Susan Wright, ourcorporate secretary and wife of our chief executive officer, provides corporatesecretary services to us on a contract basis. During the nine months endedSeptember 30, 2006 and 2005, Mrs. Wright was paid $68,000 and $15,500,respectively, for contract services.

InJanuary 2006, we issued 40,000 warrants to a former director for servicesrendered in respect to our offering of the Notes. These warrants immediatelyvested with an exercise price of $7.00 per share.  We recorded $92,000 asthe estimated fair value of the warrants as deferred debt issuance costs, witha corresponding increase in additional paid-in-capital.

One of ourofficers (and director) and two of our directors purchased $100,000 and $1.2million, respectively, of the Notes that were issued in March 2006. During thenine months ended September 30, 2006, we have paid interest of $5,944 and$78,389, respectively, on these Notes.  In addition, a former directorpurchased $1 million of the Notes and was paid interest of $61,668 during thissame period.

**Note 8 —Subsequent Events**

On October 13,2006, the Board of Directors authorized the repurchase of up to 10%, orapproximately 750,000 shares, of the Company’s outstanding common stock. Thestock repurchase authorization is effective immediately and continues throughthe end of 2006. The repurchases will be made from time to time in open marketor in negotiated transactions in such amounts as determined at the discretionof the Company’s management and will be funded out of working capital.

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**ITEM*2.******    *MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

Unless the contextrequires otherwise, the terms “PRB,” “the Company,” “us,” “we” and “our” referto PRB Energy, Inc. and its subsidiaries.

**Statementof Forward-Looking Statements**

This quarterlyreport on Form 10-Q contains forward-looking statements within the meaning ofSection 27A of the Securities Act of 1933, as amended, andSection 21E of the Securities Exchange Act of 1934, as amended. Thesestatements identify prospective information. Important factors could causeactual results to differ, possibly materially, from those in the forward-lookingstatements. In some cases you can identify forward-looking statements by wordssuch as “anticipate,” “believe,” “could,” “estimate,” “expect,” “plan,” “intend,”“may,” “should,” “will” and “would” or other similar words. You should readstatements that contain these words carefully because they discuss our futureexpectations, contain projections of our future results of operations or of ourfinancial position, or state other “forward-looking” information. We believethat it is important to communicate our future expectations to our investors.There may, however, be events in the future that we are not able to accuratelypredict or control. These forward-looking statements are subject to a number ofrisks, uncertainties and assumptions, including those listed under item 1A “RiskFactors” in our Annual Report on Form 10-K for the year ended December 31,2005.

We undertake noobligation to update publicly or revise any forward-looking statements. Youshould not rely upon forward-looking statements as predictions of future eventsor performance. We cannot assure you that the events and circumstancesreflected in the forward-looking statements will be achieved or occur. Althoughwe believe that the expectations reflected in the forward-looking statementsare reasonable, we cannot guarantee future results, levels of activity,performance or achievements.

You should readthe following discussion in conjunction with the financial statements andrelated notes in Item 1 and our Annual Report on Form 10-K for the year endedDecember 31, 2005.

**General Overview**

PRB is anindependent energy company engaged in the acquisition, exploration, developmentand production of natural gas and oil. In addition, we provide gas gathering,processing and compression services for properties we operate and for third-partyproducers. Through June 30, 2006, we also provided contract management servicesby operating certain properties for a third party and providing technical andadministrative support for those properties. PRB was initially formed under thename “PRB Transportation, Inc.” in December 2003 and was incorporated in theState of Nevada. On June 14, 2006, PRB’s name was changed to “PRB Energy, Inc.”PRB conducts its primary business activities in Wyoming.  PRB operates through two wholly-ownedsubsidiaries: PRB Oil and Gas, Inc., an oil and gas exploration and productioncompany and PRB Gathering, Inc., a gathering and processing company.

**NineMonths Ended September 30, 2006 - Operational and Financial Highlights**

In the firstquarter of 2006, we raised approximately $22 million in cash, before expenses,through a private offering by issuing senior subordinated convertible notes.These funds will be used for our exploration, development, and assetacquisition programs.

Also, in the firstquarter of 2006, we acquired two gas gathering systems in the Recluse area ofWyoming (together our “Recluse” gathering system) for approximately $1.5million. In addition, under two separate transactions totaling $183,000, we acquireda combination of working interests ranging from 7.5% to 15% in the developmentof approximately 5,600 net acres in the Recluse and Gap gathering system areasthat offer us the opportunity to expand both our exploration and production andgas gathering and processing activities.

On June 30, 2006,we acquired working interests in approximately 580 gross (529 net) coal-bedmethane wells on approximately 29,000 acres located in the Powder River Basinfrom Pennaco Energy, Inc. (“Pennaco”). The purchase price of the acquiredinterests was approximately $600,000 and the effective date was July 1, 2006.As part of the purchase agreement, we issued a $3 million reducing letter ofcredit to the benefit of Pennaco to guarantee the funding of the futureliability of the plugging costs of wells being purchased from Pennaco. Theasset retirement obligation of these wells has been recorded on the balancesheet for $2 million based on the discounted present value of the futureliability, as further reflected in Note 3 to the financial statements in thisreport. The letter of credit is collateralized by a $3 million certificate ofdeposit, and is considered restricted cash for purposes of available workingcapital (refer to the Liquidity and Capital Resources section).

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Of the 580 grosswells acquired during the third quarter, fewer than 150 wells were commerciallyproducing natural gas at a combined rate of up to 2.5 million cubic feet perday (MMcf/d).  We currently haveapproximately 220 wells on production and plan to bring an additional 230shut-in wells back on production, which will require additional capitalexpenditures.  In this regard, anestimate by our technical staff of $1.5 million has been included in the 2006capital budget and has been reflected in oil and gas properties in the balancesheet.

On August 4, 2006,we closed on an acquisition of approximately 70 miles of gathering lines in theRecluse area which will provide additional opportunities for expandinggathering services to producers in the 100,000 acres surrounding the pipelines.The transaction was effective August 1, 2006, and the $428,000 purchase pricewas paid in cash.

InMarch 2006, we terminated a Farmout and Development Agreement dated August1, 2005 (“Farmout Agreement”) with Enterra Energy Trust’s wholly-ownedsubsidiary Rocky Mountain Gas, Inc. (“RMG”). In June 2006, RMG filed an arbitration demand against PRB.  On August 22, 2006, PRB denied RMG’sarbitration claims, and asserted counterclaims against RMG.  The arbitration is scheduled for February2007.

As of September 1,2006 we sold certain gas gathering assets referred to as the TOP GatheringSystem (TOP) to Arete Industries, Inc. for $330,000 in cash.  The net gain on the sale of $308,000 isreflected in Other Income in the current quarter’s financial statements.

During the ninemonths of 2006, we drilled 46 gross (26.5 net) wells which were in variousstages of drilling or completion.  Inaddition, there are 14 gross (7.0 net) wells that are producing gas which hadbeen drilled prior to this year.  We haveincreased our overall average daily net gas production from 77 thousand cubicfeet per day in January 2006, to 3.5 MMcf/d (including the Pennaco wells) inSeptember 2006, substantially increasing our gas production over 2005.

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**Results of Operations**

 

The financialinformation with respect to the three months and nine months ended September30, 2006 and 2005, which is discussed below, is unaudited. In the opinion ofmanagement, such information contains all adjustments, consisting only ofnormal recurring accruals, necessary for a fair presentation of the results forsuch periods. The results of operations for interim periods are not necessarilyindicative of the results of operations for the full fiscal year.

***Three months ended September 30, 2006 (unaudited) comparedto the three months ended September 30, 2005 (unaudited)***
| ** **                                | ** ** | ** **                                     | ** ** | ** **     | ** ** | **Increase /**       | ** ** | **Percentage**            | ** ** |
|-------------------------------------------|------------|------------------------------------------------|------------|----------------|------------|---------------------------|------------|---------------------------|------------|
| ** **                                | ** ** | **Quarter Ended September 30,** | ** ** | **(Decrease)** | ** ** | **Change**                | ** ** |
| ** **                                | ** ** | **2006**                                       | ** ** | **2005**       | ** ** | **2006 v 2005** | ** ** | **2006 v 2005** | ** ** |
| ** **                                | ** ** | **(Dollars in thousands)**           | ** ** |
| **Revenue**                               | ** ** | ** **                                     | ** ** | ** **     | ** ** | ** **                | ** ** | ** **                | ** ** |
| Gas gathering  and processing             | ** ** | $                                              | 314        |           | $          | 658                       |       | $                         | (344       | ) | -52 | % |
| Natural gas  sales                        |       | 776                                            |       | —         |       | 776                       |       | nm                        |       |
| Other                                     |       | 8                                              |       | 66             |       | (58                       | )          | -88                       | %          |
| Total revenue                             |       | 1,098                                          |       | 724            |       | 374                       |       | 52                        | %          |
| Natural gas  gathering expenses and taxes |       | (298                                           | )          | —         |       | (298                      | )          | nm                        |       |
| **Net revenue**                           | ** ** | **800**                                        | ** ** | **724**        | ** ** | **76**                    | ** ** | **10**                    | **%**      |
| **Operating  expenses**                   |       |                                           |       |           |       |                      |       |                      |       |
| Gas gathering  and processing operations  |       | 425                                            |       | 418            |       | 7                         |       | 2                         | %          |
| Natural gas  lease operating              |       | 370                                            |       | —         |       | 370                       |       | nm                        |       |
| General and  administrative               |       | 977                                            |       | 584            |       | 393                       |       | 67                        | %          |
| Depreciation,  depletion and amortization |       | 759                                            |       | 281            |       | 478                       |       | 170                       | %          |
| Impairment and  other                     |       | —                                         |       | 2,372          |       | (2,372                    | )          | nm                        |       |
| **Total expenses**                        | ** ** | **2,531**                                      | ** ** | **3,655**      | ** ** | **(1,124**                | **)**      | **-31**                   | **%**      |
| **Operating  loss**                       | ** ** | **(1,731**                                     | **)**      | **(2,931**     | **)**      | **1,200**                 | ** ** | **41**                    | **%**      |
|                                      |       |                                           |       |           |       |                      |       |                      |       |
| Other income  (expense)                   |       |                                           |       |           |       |                      |       |                      |       |
| Other income                              |       | 308                                            |       | —         |       | 308                       |       | nm                        |       |
| Interest (expense) income, net            |       | (343                                           | )          | 63             |       | (406                      | )          | nm                        |       |
| **Net  loss**                             | ** ** | **$**                                          | **(1,766** | **)**          | **$**      | **(2,868**                | **)**      | **$**                     | **1,102**  | ** ** | **38** | **%** |

 

----

nm – percentages greaterthan 200% and comparisons from positive to negative values are not consideredmeaningful.

***Revenues***

Total revenues increased$374,000, or 52%, for the quarter ended September 30, 2006 compared to lastyear’s third quarter as the result of natural gas sales of $776,000 offset by a$344,000 decrease in gas gathering and processing from our TOP, GAP andBonepile systems.  The decrease resultedfrom the Pennaco acquisition which had the effect of converting previous third-partyrevenues into PRB’s company-owned subsidiary revenues.  There were no gas sales last year during thethird quarter.  We also had managementfee revenues during the quarter ended September 30, 2005, but none for 2006, asthe RMG agreement (see Note 2) ended on June 30, 2006.

Other 2006 naturalgas expenses included gathering charges and production taxes from the acquiredproperties.

***Gas Gathering andProcessing Operations Expenses***

Gas gathering andprocessing operations expenses were comparable to last year primarily due tothe increase of operating costs in the Recluse gathering system acquired in2006, offsetting reduced costs of systems sold in 2006.

***Natural Gas Lease OperatingExpenses***

Natural gas leaseoperating expenses resulted from acquired field operations activities in2006.  We substantially increased fieldoperation activities this quarter as a result of the Pennaco acquisition.

***General andAdministrative Expenses***

General andadministrative expenses had a significant increase of $393,000 due to (1) therecognition of $94,000 of share-based options and warrants compensationexpense, (2) employee compensation and benefits increasing by approximately$200,000 over last year as a result of substantial increases (from 7 to 24) inthe number of employees added since the third quarter of 2005, and (3)professional fees increasing approximately $106,000 due to public reportingrequirements that include legal, auditing, and financial and corporateconsulting activities.

***Depreciation,depletion, amortization, and impairments***

Increased DD&Aexpense in 2006 resulted from the acquired properties.  An asset impairment charge of $2,372,000 forthe TOP system was booked in the third quarter of 2005.

***Other Income andExpense***

Other income resultedfrom the sale of the TOP gathering system in the current quarter.  Interest expense resulted from convertiblenotes issued in the first quarter, offset by interest income.

14

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***Ninemonths ended September 30, 2006 (unaudited) compared to the nine months endedSeptember 30, 2005 (unaudited)***
| ** **                               | ** ** | **Nine months Ended September 30,** | ** ** | **Increase /  (Decrease)** | ** ** | **Percentage  Change**    | ** ** |
|------------------------------------------|------------|---------------------------------------------------------|------------|---------------------------------|------------|---------------------------|------------|
| ** **                               | ** ** | **2006**                                                | ** ** | **2005**                        | ** ** | **2006 v 2005** | ** ** | **2006 v 2005** | ** ** |
| ** **                               | ** ** | **(Dollars in thousands)**                    | ** ** |
| **Revenue**                              |       |                                                    |       |                            |       |                      |       |   |   |
| Gas gathering and processing             |       | $                                                       | 1,592      |                            | $          | 2,214                     |       | $ | (622 | ) | -28 | % |
| Natural gas sales                        |       | 882                                                     |       | —                          |       | 882                       |       | nm |   |
| Other                                    |       | 154                                                     |       | 66                              |       | 88                        |       | 133 | % |
| **Total revenue**                        |       | 2,628                                                   |       | 2,280                           |       | 348                       |       | 15 | % |
| Natural gas gathering expenses and taxes |       | (344                                                    | )          | —                          |       | (344                      | )          | nm |   |
| **Net revenue**                          |       | **2,284**                                               | ** ** | **2,280**                       | ** ** | **4**                     | ** ** | **nm** | ** ** |
| **Operating expenses**                   |       |                                                    |       |                            |       |                      |       |   |   |
| Gas gathering and processing operations  |       | 1,681                                                   |       | 1,293                           |       | 388                       |       | 30 | % |
| Natural gas lease operating              |       | 497                                                     |       | —                          |       | 497                       |       | nm |   |
| General and administrative               |       | 3,123                                                   |       | 1,311                           |       | 1,812                     |       | 138 | % |
| Depreciation, depletion and amortization |       | 1,415                                                   |       | 838                             |       | 577                       |       | 69 | % |
| Impairment and other                     |       | 50                                                      |       | 2,372                           |       | (2,322                    | )          | nm |   |
| **Total expenses**                       |       | **6,766**                                               | ** ** | **5,814**                       | ** ** | **952**                   | ** ** | **16** | **%** |
| **Operating loss**                       |       | **(4,482**                                              | **)**      | **(3,534**                      | **)**      | **(948**                  | **)**      | **-27** | **%** |
|                                     |       |                                                    |       |                            |       |                      |       |   |   |
| Other income (expense)                   |       |                                                    |       |                            |       |                      |       |   |   |
| Other income                             |       | 311                                                     |       | (205                            | )          | 516                       |       | nm |   |
| Interest (expense)  income, net          |       | (907                                                    | )          | 62                              |       | (969                      | )          | nm |   |
| **Net loss**                             |       | **$**                                                   | **(5,078** | **)**                           | **$**      | **(3,677**                | **)**      | **$** | **(1,401** | **)** | **-38** | **%** |
|                                     |       |                                                    |       |                            |       |                      |       |   |   |
| Cash used in operating activities        |       | $                                                       | (3,075     | )                               | $          | (306                      | )          | $ | 2,769 |   | nm |   |
| Cash used in investing activities        |       | $                                                       | (11,973    | )                               | $          | (1,192                    | )          | $ | 10,781 |   | nm |   |
| Cash provided by financing activities    |       | $                                                       | 20,906     |                            | $          | 9,169                     |       | $ | 11,737 |   | 128 | % |

 

----

nm – percentages greaterthan 200% and comparisons from positive to negative values are not consideredmeaningful.

***Revenues***

Total revenues increased $348,000, or 15%, for theperiod ended September 30, 2006 compared to last year as the result of naturalgas sales of $882,000 offset by a $622,000 decrease in gas gathering andprocessing from our TOP, GAP and Bonepile systems resulting from the Pennaco acquisitionwhich had the effect of converting previous third-party revenues into PRB’scompany-owned subsidiary revenues.  Therewere no gas sales last year during the third quarter.  We also had management fee revenues duringthe period ended September 30, 2005, but none for 2006, as the RMG agreement(see Note 2) ended on June 30, 2006.

Other 2006 natural gas and lease operating expensesincluded gathering charges and production taxes resulting from the acquiredproperties.

 

***Gas Gathering andProcessing Operating Expenses***

Gas gathering andprocessing expenses increased $388,000, or 30%, over last year primarily due tothe increase of the operating costs in the Recluse gathering system acquired in2006.

***Natural Gas LeaseOperating Expenses***

Natural gas leaseoperating expenses resulted from acquired field operations activities in2006.  We substantially increased fieldoperation activities this quarter as a result of the Pennaco acquisition.

15

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***General andAdministrative Expenses***

General andadministrative expenses had a significant increase of $1,812,000 due to (1) therecognition of $556,000 of share-based options and warrants compensationexpense, (2) employee compensation and benefits increasing by approximately$600,000 over last year as a result of substantial increases (from 7 to 24) inthe number of employees added due to our growth since the nine months endedSeptember 30,2005, and (3) professional fees increasing approximately $496,000due to public reporting requirements that include legal, auditing, andfinancial and corporate consulting activities.

***Depreciation,depletion,  amortization, and impairments***

Increased DD&Aexpense in 2006 resulted from the acquired properties.  An asset impairment charge of $2,372,000 forthe TOP system was booked in the third quarter of 2005.

***Other Income andExpense***

Other income resultedfrom the sale of the TOP gathering system in the current quarter.  In 2005 dividend expense was recognized onthe convertible preferred stock. Interest expense resulted from convertible notes issued in the firstquarter of 2006, offset by interest income.

**Liquidityand Capital Resources**

***Cash Flows and Capital Expenditures***

At September 30,2006, cash and cash equivalents totaled $12.3 million. Additionally, wehave $3 million of restricted cash which collateralizes a reducing letter ofcredit issued in connection with potential plugging liabilities of acquiredproperties as provided for in the May 1, 2006 purchase and sale agreement  between Pennaco and PRB. The restricted cashwill be released at the same rate annually that the letter of credit isreduced. Working capital, excluding the restricted $3 million, was $12 million.During the first quarter of 2006, we raised approximately $22 million, beforeexpenses, by issuing senior subordinated convertible notes. These funds haveprovided working capital for our exploration, development and asset acquisitionprograms.

We believe thatour cash and cash equivalents on hand, internally generated cash flows andfuture financing activities will be sufficient to fund our planned operational,drilling and acquisition and capital expenditures for the foreseeable future.The amount and allocation of future capital and exploration expenditures willdepend upon a number of factors including the number and size of acquisitionsand drilling opportunities, our cash flows from operating and financingactivities and our ability to assimilate acquisitions. Also, the impact of oiland gas prices on investment opportunities, the availability of capital andborrowing facilities and the success of our exploration and developmentactivities could lead to changes in funding requirements for futuredevelopment.

*Cash FlowUsed in Operating Activities*

During the ninemonths ended September 30, 2006, our net loss of $5 million included non-cashcharges of $1,415,000 of DD&A expense, $ 415,000 of share-basedcompensation expense and $267,000 of interest expense resulting fromamortization of debt issuance costs.

Cash used inoperating activities of $3.1 million during the first nine months of 2006 was$2.8 million greater than the same period of 2005. This increase was mainlyattributable to increased debt interest payments, higher general andadministrative expense for staff increases and increased gas productionoperations.

*Cash FlowUsed in Investing Activities*

Cash used in investingactivities was $12 million during the first nine months of 2006, representingan increase of $11 million compared to 2005 period.  During 2006, we acquired various segments ofthe Recluse gathering system for approximately $2 million and acquiredinterests in Wyoming coal-bed methane (“CBM”) wells for approximately $730,000which included additional related transaction expenses.  We also invested $ 5.2 million in drillingand completion activities to develop proved properties, $192,000 forundeveloped leaseholds and $700,000 for other plant and equipment.  In addition, as part of the acquisition ofthe CBM wells, we issued a $3 million reducing letter of credit to the benefitof Pennaco to guarantee the funding of the future liability of the pluggingcosts of wells being purchased from Pennaco.

At September 30, 2006, capitalized costs of wells-in-progress wereapproximately $3.7 million and consisted of 46 gross wells in various stages ofdrilling or completion.    None of thesewells are in an area requiring major capital expenditures before production maybegin, nor were any of these wells completed more than one year ago.  These wells are drilling, being completed, orare undergoing de-watering processes.  Webelieve that after the wells have been de-watered, we will be able to commenceproduction.

Currently, our 2006 capital expenditure program calls for investingapproximately $11 million in oil and gas exploration, development andacquisition projects and gas gathering system projects.  Approximately $1.5 million of that amount hasbeen earmarked for remediation expenditures for the CBM wells acquired in June2006.

16

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*Cash Flowfrom Financing Activities*

Cash provided byfinancing activities of $21 million for the nine months ended September 30,2006 represents an increase of $11.7 million as compared to last year.  During the first quarter of 2006, we raisedapproximately $22 million from the issuance of senior subordinated convertiblenotes and incurred approximately $1 million in debt issuance costs, excludingthe value of warrants issued.  In 2005,we raised $11 million, net of issuance costs, in a public offering, repaid $1.5million of bank debt and paid $338,000 in convertible preferred stockdividends.

*OffBalance-Sheet Arrangements**.***

We do not have anyoff-balance sheet financing arrangements as of September 30, 2006, except forour Storm Cat gas gathering services agreement (“Agreement”).  OurAgreement requires Storm Cat to pay us gas gathering fees on specific minimumvolumes of gas whether or not those volumes are delivered and transportedthrough our system.    The Agreementhas a 10-year term, of which the first five years are noncancelable. TheAgreement requires Storm Cat to pay us a minimum of $972,000 in 2006 and anaggregate minimum of $3.1 million in gas gathering fees during the first threeyears of the Agreement.  The Agreementalso provides for our gas gathering rates to decrease during the fourth andfifth years.  The Agreement allows for acash true-up payment at each year-end if the annual volume commitment under theAgreement is not met.

**Critical Accounting Policies andEstimates**

We refer you to the corresponding section in Part II, Item 7 of our2005 Annual Report on Form 10-K, and to the footnote disclosures included inPart I, Item 1 of this report.

**ITEM3:****   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

There have been nomaterial changes in market risk from the information provided under “Quantitativeand Qualitative Disclosures about Market Risk” in Item 7A of PRB’s AnnualReport on Form 10-K for the fiscal year ended December 31, 2005.

**ITEM4:***   ***CONTROLS AND PROCEDURES**

**ConclusionRegarding the Effectiveness of Disclosure Controls and Procedures**

We maintaindisclosure controls and procedures designed to provide reasonable assurancethat information required to be disclosed in our reports under the Securitiesand Exchange Act of 1934, as amended, is recorded, processed, summarized andreported within the time periods specified in the Securities and ExchangeCommission (“SEC”) rules and forms, and that such information is accumulatedand communicated to our management, including our Chief Executive Officer andPrincipal Financial Officer, as appropriate, to allow timely decisionsregarding required disclosure.

Earlier this year,our management, with the participation and oversight of our Chief ExecutiveOfficer and Principal Financial Officer, evaluated the design and effectivenessof our disclosure controls and procedures. In conducting this evaluation,several significant deficiencies were identified in our internal control overfinancial reporting relating to the preparation and review of financialstatements and disclosures, identification and resolution of complex accountingissues, segregation of duties, accounting policies and procedures, informationtechnology systems, and revenue recognition. Management has determined thatthese significant deficiencies, in the aggregate, constituted a materialweakness in internal control over financial reporting.  Specifically, our earlier staffing levelswere inadequate to facilitate the design, implementation and maintenance of aneffective system of internal control.

Although progresshas been made in the current quarter in remedying these weaknesses,particularly through new hires and experience levels of the staff and by thefull implementation of accounting software systems, the conclusions by ourChief Executive Officer and Principal Financial Officer are that our disclosurecontrols and procedures require additional reviews through the next quarter andwere not effective as of September 30, 2006.

**Remediationof the Material Weakness**

In response to thecontrol deficiencies listed above, we have taken (or plan to take during theremainder of 2006) the following steps to change our internal control overfinancial reporting to institute procedures to remediate the significantdeficiencies and material weakness identified above:

 

·        Wehave doubled the accounting staff to six experienced accountants to provide theadditional expertise in the areas of SEC reporting and complex accountingissues. Additionally, we have engaged outside help to assist us with complexaccounting and financial reporting matters. Continued training of current staffand the need for additional resources will be evaluated from time to time.

·        Wehave fully implemented the Enertia accounting software to provide a more robustaccounting and reporting software package that will enable us to increase ourcontrols over system generated reports, offering a full range of operations andfinancial accounting functionality.

·        Weplan to complete the implementation of disclosure controls and procedures byyear-end 2006 reporting which will provide additional oversight and controlover the completeness and accuracy of the Company’s financial statements anddisclosures included in periodic filings with the SEC.

·        We will document ouraccounting policies and procedures and enhance our month end close andfinancial reporting processes by year-end 2006 reporting to include additionalcontrols to improve the completeness and accuracy of our periodic financialstatements.

17

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Because a numberof these procedures are recent and ongoing this year, and since financialmanagement personnel changes have been made recently, we have not completed aformal review of our internal controls, and even upon completion of suchreview, there is no assurance that we will have adequately addressed theidentified deficiencies, as has been characteristic of companies that haveinitially completed their review of internal control and have had to report onthe results of such review. Accordingly, our internal control over financialreporting may be subject to additional material weaknesses and significantdeficiencies that we have not identified.

On September 21,2005, the SEC extended the compliance dates related to Section 404 of theSarbanes-Oxley Act (“Section 404”) for non-accelerated filers. Under thisextension a company that is not required to file its annual and quarterlyreports on an accelerated basis (non-accelerated filer) must begin to complywith the Section 404 internal control over financial reporting evaluationand reporting requirements for its first fiscal year ending on or afterJuly 15, 2007. A proposal was announced by the SEC on August 9, 2006 thatthis date may be further extended to fiscal years ending on or after December15, 2007. The SEC also proposes to extend the date by which non-acceleratedfilers must begin to comply with the Section 404(b) requirement to provide anauditor’s attestation report on internal control over financial reporting intheir annual reports.  This deadline would be moved to the first annualreport for a fiscal year ending on or after December 15, 2008.

18

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**PART II OTHER INFORMATION**

** ITEM 1:****   LEGAL PROCEEDINGS**

On June 22, 2006,RMG filed an arbitration demand against PRB. On August 22, 2006, PRB denied RMG’s arbitration claims, and assertedcounterclaims against RMG.  Thearbitration is scheduled for February 2007. At this time, we cannot predict the outcome of arbitration.  (Refer to Part I, Note 2 to our financialstatements in this report regarding the Rocky Mountain Gas Agreement.)

**ITEM1A. RISK FACTORS**

For informationregarding factors that could affect our results of operations, financialcondition and liquidity, see the risk factors discussion provided underItem 1A of our Annual Report on Form 10-K for the year endedDecember 31, 2005. See also “Forward-Looking Statements” included in PartI, Item 2 of this Quarterly Report on Form 10-Q.

** ITEM 2:****   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

None.

** ITEM 3:****   DEFAULTS UPON SENIOR SECURITIES**

None.

**ITEM4:****   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

None.

**ITEM5:****   OTHER INFORMATION**

None.

19

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** **

**ITEM 6:****   EXHIBITS**

 
| Exhibit  Number | ** ** | **Description**                                                                                                                                                                                                                          |
|-----------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |       |                                                                                                                                                                                                                                     |
| (3.1)           |       | Amended Articles of Incorporation of the Registrant  (filed as an exhibit to Form S-1/A filed on January 28, 2005 and  incorporated by reference herein).                                                                      |
|            |       |                                                                                                                                                                                                                                     |
| (3.2)           |       | Amended By-laws of the Registrant (filed as an  exhibit to Form S-1/A filed on January 28, 2005 and incorporated by  reference herein).                                                                                        |
|            |       |                                                                                                                                                                                                                                     |
| (3.3)           |       | Series A Preferred Stock Certificate of  Designation (filed as an exhibit to Form S-1 filed on November 1,  2004 and incorporated by reference herein).                                                                   |
|            |       |                                                                                                                                                                                                                                     |
| (3.4)           |       | Series B Preferred Stock Certificate of Designation  Filed (filed as an exhibit to Form S-1 filed on November 1, 2004  and incorporated by reference herein).                                                             |
|            |       |                                                                                                                                                                                                                                     |
| (3.5)           |       | Series C Preferred Stock Certificate of  Designation Filed (filed as an exhibit to Form S-1/A filed on  January 28, 2005 and incorporated by reference herein).                                                           |
|            |       |                                                                                                                                                                                                                                     |
| (4.1)           |       | Form of Lockup Agreement—Officers, Directors  and 5% Stockholders (filed as an exhibit to Form S-1/A filed on  November 1, 2004 and incorporated by reference herein).                                               |
|            |       |                                                                                                                                                                                                                                     |
| (4.2)           |       | Form of Lockup Agreement—Series A and B  Preferred Stockholders (filed as an exhibit to Form S-1 filed on  November 1, 2004 and incorporated by reference herein).                                              |
|            |       |                                                                                                                                                                                                                                     |
| (4.3)           |       | Form of Underwriter’s Warrant Agreement (filed  as an exhibit to Form S-1/A filed on January 28, 2005 and  incorporated by reference herein).                                                                        |
|            |       |                                                                                                                                                                                                                                     |
| (4.4)           |       | Form of Lockup Agreement—Series C  Preferred Stockholders (filed as an exhibit to Form S-1/A filed on  January 28, 2005 and incorporated by reference herein).                                                  |
|            |       |                                                                                                                                                                                                                                     |
| (4.5)           |       | Sample Common Stock Certificate (filed as an exhibit  to Form 8-A filed on April 8, 2005).                                                                                                                                     |
|            |       |                                                                                                                                                                                                                                     |
| (4.6)           |       | Form of Senior Subordinated Convertible Note  (filed as an exhibit to Form 10-K on April 14, 2006 and incorporated by  reference herein).                                                                                           |
|            |       |                                                                                                                                                                                                                                     |
| (4.7)           |       | Form of Registration Rights Agreement between  the Company and the holders of the Company’s Senior Subordinated Convertible  Notes (filed as an exhibit to Form 10-K on April 14, 2006 and incorporated by  reference herein). |
|            |       |                                                                                                                                                                                                                                     |
| 10.18           |       | Purchase and Sale Agreement between PRB Energy,  Inc., and Arête Industries Inc., dated September 1, 2006                                                                                                                           |
|            |       |                                                                                                                                                                                                                                     |
| 10.19           |       | Purchase and Sale Agreement between PRB Energy,  Inc., and Maverick Pipeline LLC, dated August 1, 2006                                                                                                                                   |

 

20

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| Exhibit  Number | ** ** | **Description**                                                                                                                                                 |
|-----------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |       |                                                                                                                                                            |
| 31.1            |       | Chief Executive Officer Certification pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                          |
|            |       |                                                                                                                                                            |
| 31.2            |       | Principal Financial Officer Certification pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002.                                                      |
|            |       |                                                                                                                                                            |
| 32.1            |       | Chief Executive Officer Certification pursuant to 18  U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.     |
|            |       |                                                                                                                                                            |
| 32.2            |       | Principal Financial Officer Certification pursuant  to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002. |

 

These exhibits areavailable upon request. Exhibits identified in parentheses above are on filewith the SEC and are incorporated herein by reference. All other exhibits areprovided as part of this electronic submission.

----

( )               Previously filed.

21

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**SIGNATURE**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
|   |   | PRB Energy, Inc. |
|--------|--------|------------------|
|   |   | (Registrant)     |
|   |   |             |
|   |   | By:              |   | /s/ Robert W. Wright |
|   |   |             |   | Name: Robert W. Wright |
|   |   |             |   | Title: Chairman and Chief Executive Officer |
|   |   |             |   |   |
|   |   | By:              |   | /s/ Daniel D. Reichel |
|   |   |             |   | Name: Daniel D. Reichel |
|   |   |             |   | Title: Vice President—Finance and Treasurer |
|   |   |             |   | (Principal Financial Officer) |

 

Dated: November 13, 2006

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