**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.20549**

**Form 10-Q**

**(Mark One)**
| **x**                                                                                                                                                             | ** ** | **QUARTERLY REPORT PURSUANT TO   SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                        | ** ** | ** **                                                                                                                        |
| **For the  quarterly period ended March 31, 2007**                                                                                                                |
| ** **                                                                                                                                                        | ** ** | ** **                                                                                                                        |
| **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 markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  o Accelerated filer  o   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’s classesof common stock, as of the latest practicable date.

| **Class**                       |   | **Outstanding  as of May 11, 2007** |
|---------------------------------|--------|-------------------------------------|
| Common Stock,  $0.001 par value |   | 8,601,994 Shares                    |

 

 

----

**TABLEOF CONTENTS**
| PART  I — Financial Information |                                                                                        |   |
|--------------------------------------|---------------------------------------------------------------------------------------------|--------|
| Item 1.                         | Financial  Statements                                                                       |   |   |
| Item 2.                         | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |   |   |
| Item 3.                         | Quantitative  and Qualitative Disclosures About Market Risk                                 |   |   |
| Item 4.                         | Controls and  Procedures                                                                    |   |   |
| PART II — Other  Information    |                                                                                        |   |
| Item 1.                         | Legal Proceedings                                                                           |   |   |
| Item  1A.                            | Risk  Factors                                                                               |   |   |
| Item 6.                         | Exhibits                                                                                    |   |   |
|                                 | Signatures                                                                                  |   |   |

 

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

----

**PART I — FINANCIAL INFORMATION**

**ITEM 1. FINANCIALSTATEMENTS**

**PRBENERGY, INC.****ConsolidatedBalance Sheets(In thousands, except share amounts)**
| ** **                                                                                                                         | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                         | ** ** | **2007**           | ** ** | **2006**              | ** ** |
| ** **                                                                                                                         | ** ** | **(Unaudited)**    | ** ** | ** **            | ** ** |
| **Assets**                                                                                                                         | ** ** | ** **         | ** ** | ** **            | ** ** |
| Current assets:                                                                                                                    |       |               |       |                  |       |
| Cash and cash equivalents                                                                                                          |       | $                  | 6,917      |                  | $          | 11,157 |   |
| Restricted cash                                                                                                                    |       | 2,117              |       | 2,078                 |       |
| Accounts receivable                                                                                                                |       | 1,263              |       | 2,527                 |       |
| Prepaid expenses                                                                                                                   |       | 1,656              |       | 789                   |       |
| **Total current assets**                                                                                                           | ** ** | **11,953**         |       | **16,551**            | ** ** |
| Oil and gas  properties accounted for under the successful efforts method of accounting:                                           |       |               |       |                  |       |
| Proved properties                                                                                                                  |       | 5,745              |       | 5,436                 |       |
| Unproved leaseholds                                                                                                                |       | 9,240              |       | 9,282                 |       |
| Wells-in-progress                                                                                                                  |       | 6,440              |       | 5,794                 |       |
| Total oil and gas properties                                                                                                       |       | 21,425             |       | 20,512                |       |
| Less: accumulated depreciation, depletion and  amortization                                                                        |       | (974               | )          | (766                  | )          |
| **Net oil and gas properties**                                                                                                     | ** ** | **20,451**         |       | **19,746**            | ** ** |
| Gathering and  other property and equipment                                                                                        |       | 14,828             |       | 11,603                |       |
| Less: accumulated depreciation and amortization                                                                                    |       | (2,397             | )          | (1,919                | )          |
| **Net gathering and other property and equipment**                                                                                 | ** ** | **12,431**         |       | **9,684**             | ** ** |
| Other  non-current assets:                                                                                                         |       |               |       |                  |       |
| Deferred debt issuance costs                                                                                                       |       | 2,198              |       | 2,086                 |       |
| Less: accumulated amortization                                                                                                     |       | (625               | )          | (375                  | )          |
| Net deferred debt issuance costs                                                                                                   |       | 1,573              |       | 1,711                 |       |
| Other non-current assets                                                                                                           |       | 2,698              |       | 2,151                 |       |
| **Total other non-current assets**                                                                                                 | ** ** | **4,271**          |       | **3,862**             | ** ** |
| **Total  Assets**                                                                                                                  | ** ** | **$**              | **49,106** |                  | **$**      | **49,843** | ** ** |
| ** **                                                                                                                         | ** ** | ** **         | ** ** | ** **            | ** ** |
| **Liabilities and Stockholders’ Equity**                                                                                      | ** ** | ** **         | ** ** | ** **            | ** ** |
| Current  liabilities:                                                                                                              |       |               |       |                  |       |
| Accounts payable                                                                                                                   |       | $                  | 2,041      |                  | $          | 1,854 |   |
| Accrued expenses and other current liabilities                                                                                     |       | 584                |       | 979                   |       |
| **Total current liabilities**                                                                                                      | ** ** | **2,625**          | ** ** | **2,833**             | ** ** |
| Secured notes,  debentures and other debt, less current portion                                                                    |       | 36,970             |       | 36,972                |       |
| Discount on  debentures, net of amortization                                                                                       |       | (3,830             | )          | (4,326                | )          |
| Capital lease,  less current portion                                                                                               |       | 2,974              |       | —                |       |
| Other  non-current liabilities                                                                                                     |       | 3,315              |       | 3,140                 |       |
| **Total liabilities**                                                                                                              | ** ** | **42,054**         |       | **38,619**            | ** ** |
| Commitments and  Contingencies                                                                                                     |       |               |       |                  |       |
| Stockholders’  equity:                                                                                                        |       |               |       |                  |       |
| Common stock, 40,000,000 shares authorized;  8,601,994 and 8,231,894 issued, and 8,601,994 and 8,601,994 outstanding, respectively |       | 10                 |       | 10                    |       |
| Treasury stock                                                                                                                     |       | (1,257             | )          | (1,257                | )          |
| Additional paid-in-capital                                                                                                         |       | 26,664             |       | 26,406                |       |
| Accumulated deficit                                                                                                                |       | (18,365            | )          | (13,935               | )          |
| **Total stockholders’ equity**                                                                                                | ** ** | **7,052**          |       | 11,224                |       |
| **Total Liabilities and  Stockholders’ Equity**                                                                               | ** ** | **$**              | **49,106** |                  | **$**      | **49,843** | ** ** |

 

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

1

----

**PRBENERGY, INC.****ConsolidatedStatements of Operations(In thousands, except share amounts)(Unaudited)**
| ** **                                             | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                             | ** ** | **March 31,**               | ** ** |
| ** **                                             | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| ** **                                             | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Revenues:                                              |       |                             |       |   |   |
| Natural gas  sales                                     |       | $                                | 413        |   | $ | 58 |   |
| Gas gathering  and processing                          |       | 508                              |       | 675 |   |
| Other                                                  |       | 4                                |       | 94 |   |
| Total revenues                                         |       | 925                              |       | 827 |   |
| Natural gas  gathering expense                         |       | 56                               |       | 12 |   |
| Natural gas  production taxes                          |       | 40                               |       | 7 |   |
| **Net  revenues**                                      | ** ** | **829**                          |       | **808** | ** ** |
| Operating  expenses:                                   |       |                             |       |   |   |
| Natural gas  lease operating                           |       | 661                              |       | 59 |   |
| Gas gathering  and processing                          |       | 432                              |       | 588 |   |
| Exploration  expense                                   |       | —                           |       | 97 |   |
| Depreciation,  depletion, amortization and accretion   |       | 855                              |       | 320 |   |
| General and  administrative                            |       | 1,601                            |       | 1,017 |   |
| **Total  operating expenses**                          | ** ** | **3,549**                        |       | **2,081** | ** ** |
| **Operating  loss**                                    | ** ** | **(2,720**                       | **)**      | **(1,273** | **)** |
| Other income  (expense):                               |       |                             |       |   |   |
| Interest and  other income                             |       | 271                              |       | 187 |   |
| Interest and  other expense                            |       | (1,981                           | )          | (408 | ) |
| **Total  other (expense) income**                      | ** ** | **(1,710**                       | **)**      | **(221** | **)** |
| **Net  loss**                                          | ** ** | **$**                            | **(4,430** | **)** | **$** | **(1,494** | **)** |
|                                                   |       |                             |       |   |   |
| **Net  loss per share — basic and diluted**       | ** ** | **$**                            | **(0.51**  | **)** | **$** | **(0.20** | **)** |
|                                                   |       |                             |       |   |   |
| Basic and diluted  weighted average shares outstanding | ** ** | **8,601,994**                    | ** ** | **7,432,561** | ** ** |

 

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

2

----

**PRBENERGY, INC.Consolidated Statements of Cash Flows(In thousands)(Unaudited)**
| ** **                                                                                 | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                 | ** ** | **March 31,**               | ** ** |
| ** **                                                                                 | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| **Cash  flows from operating activities:**                                                 | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Net loss                                                                                   |       | $                                | (4,430     | ) | $ | (1,494 | ) |
| Adjustments to reconcile net loss to net cash (used  in) provided by operating activities: |       |                             |       |   |   |
| Depreciation, depletion, amortization and accretion                                        |       | 855                              |       | 320 |   |
| Exploration Expense                                                                        |       | —                           |       | 97 |   |
| Amortization of debt issuance costs                                                        |       | 250                              |       | 64 |   |
| Amortization of discount on debentures                                                     |       | 494                              |       | — |   |
| Bad Debt Expense                                                                           |       | 299                              |       | — |   |
| Share-based compensation expense                                                           |       | 258                              |       | 279 |   |
| Capitalized interest                                                                       |       | (76                              | )          | — |   |
| Changes in assets and liabilities:                                                         |       |                             |       |   |   |
| Accounts receivable                                                                        |       | 965                              |       | (446 | ) |
| Inventory                                                                                  |       | —                           |       | (38 | ) |
| Prepaid expenses                                                                           |       | (867                             | )          | (86 | ) |
| Other non-current assets                                                                   |       | (515                             | )          | 13 |   |
| Accounts payable                                                                           |       | 187                              |       | (529 | ) |
| Accrued expenses and other current liabilities                                             |       | (471                             | )          | 160 |   |
| Deferred Revenue                                                                           |       | 24                               |       | — |   |
| Other non-current liabilities                                                              |       | 16                               |       | 12 |   |
| Net cash used in operating activities                                                      | ** ** | **(3,011**                       | **)**      | **(1,648** | **)** |
| **Cash  flows from investing activities:**                                                 | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Capital expenditures                                                                       |       | (1,117                           | )          | (2,848 | ) |
| Acquisition of natural gas properties and gathering  facilities                            |       | —                           |       | (183 | ) |
| Deferred acquisition cost                                                                  |       | —                           |       | (19 | ) |
| Net cash used in investing activities                                                      | ** ** | **(1,117**                       | **)**      | **(3,050** | **)** |
| **Cash  flows from financing activities:**                                                 | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Proceeds from convertible notes                                                            |       | —                           |       | 21,965 |   |
| Issuance costs related to debentures and convertible  notes                                |       | (112                             | )          | (1,053 | ) |
| Net cash (used in) provided by financing activities                                        | ** ** | **(112**                         | **)**      | **20,912** | ** ** |
| Net (decrease)  increase in cash                                                           |       | (4,240                           | )          | 16,214 |   |
| Cash—beginning  of period                                                             |       | 11,157                           |       | 6,434 |   |
| **Cash—end  of period**                                                               | ** ** | **$**                            | **6,917**  | ** ** | **$** | **22,648** | ** ** |
|                                                                                       |       |                             |       |   |   |
| Supplemental  disclosure of cash flow activity:                                            |       |                             |       |   |   |
| Cash paid for interest                                                                     |       | $                                | 1,310      |   | $ | 246 |   |
| Supplemental  schedule for non-cash activity:                                              |       |                             |       |   |   |
| Issuance of warrants in connection with convertible  notes                                 |       | $                                | —     |   | $ | 92 |   |
| Capital remediation costs                                                                  |       | $                                | 169        |   | $ | — |   |
| Asset retirement obligations                                                               |       | $                                | 135        |   | $ | 85 |   |
| Capital Lease                                                                              |       | $                                | 3,050      |   | $ | — |   |

 

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

3

----

**PRBENERGY, INC.**

**Notes toConsolidated Financial Statements**

**March31, 2007**

**(Unaudited)**

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

***Description of Business***

PRB Energy, Inc.and its subsidiaries (“PRB,” “PRB Energy,” “the Company,” “us,” “our” or “we”)operate as an independent energy company engaged in the acquisition,exploitation, development and production of natural gas and oil.  In addition, we provide gas gathering,processing and compression services for properties we operate and forthird-party producers.  We were initiallyincorporated in Nevada under the name “PRB Transportation, Inc.” in December2003.  On June 14, 2006, we changed our name to “PRB Energy, Inc.” Our common stock is traded on the American Stock Exchange (“AMEX”) under theticker symbol “PRB.”   PRB Energy operates as two business segmentsthrough two wholly-owned subsidiaries, PRB Oil and Gas, Inc., a Coloradocorporation, a gas and oil exploitation and production company (“E&P”),formed in July, 2005 and PRB Gathering, Inc., a Colorado corporation, agathering and processing company (“G&P”), formed in August 2006.  Weconduct our business activities in Wyoming, Colorado and Nebraska.

***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 an interim period filingpresented using a condensed format, certain information and footnotedisclosures normally included in consolidated financial statements prepared inaccordance with accounting principles generally accepted in the United Statesof America have been condensed or omitted. These interim financial statements should be read in conjunction withthe audited consolidated financial statements and the summary of significantaccounting policies and notes thereto included in our 2006 Annual Report onForm 10-K.  During interim periods, we follow the same accountingpolicies outlined in our 2006 Annual Report on Form 10-K, Note 2 — Summary ofSignificant Accounting Policies.  Theconsolidated financial statements as of March 31, 2007, and for the threemonths there ended, are unaudited. Certain reclassifications have been made to the 2006 unaudited condensedconsolidated financial statements to conform to the 2007 presentation.  Such reclassifications had no effect on the2006 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 March 31, 2007 and the results of our operations and cash flows forthe three months ended March 31, 2007 and 2006. Information for interim periods may not be indicative of our results ofoperations for the entire year.

***Summary of Significant Accounting Policies***

*Useof Estimates*

Management makesestimates and assumptions that affect the amounts reported in the financialstatements and the disclosures made in the accompanying notes.  Some examples of such estimates are therealizability of inventory, the appropriate levels of various accrualsincluding asset retirement obligations, determining the remaining economiclives and carrying values of property and equipment, oil and gas properties andother long-lived assets.  In addition, weuse assumptions to estimate the fair value of share-based compensation.  See Share-Based Compensation below and Note 7- Equity Compensation Plan.  We believeour estimates and assumptions are reasonable; however, actual results maydiffer from our estimates.

*Share-BasedCompensation*

Effective January1, 2006, we adopted Statement of Financial Accounting Standards (“SFAS”) No.123(R) using the modified prospective transition method and, as a result, didnot retroactively adjust results from prior periods.  SFAS No. 123(R)requires that share-based compensation expense be measured using estimates ofthe fair value of all share-based awards and applies to new awards and toawards modified, repurchased or 

4

----

cancelled after December31, 2005, as well as to the unvested portion of awards outstanding as ofJanuary 1, 2006.  Under the modifiedprospective transition method, we are recognizing share-based compensation expenseover the remaining vesting period for awards that were outstanding but unvestedat January 1, 2006 and we are recognizing share-based compensation expense forthe fair value of all awards granted on or after January 1, 2006 as the awardsvest.  We apply the Black-Scholesvaluation model in determining the fair value of share-based payments toemployees.  See Note 7 - Equity Compensation Plan for further discussionof 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 iscomputed by dividing the net loss applicable to common stockholders by theweighted average common shares outstanding without including any potentiallydilutive securities.  Diluted EPS iscomputed by dividing the net loss applicable to common stockholders for theperiod by the weighted average common shares outstanding plus, when theireffect is dilutive, common stock equivalents.

*Concentrationsof Credit Risk*

We grant credit inthe normal course of business to customers in the United States.  Management periodically performs a creditanalysis and monitors the financial condition of our customers to reduce creditrisk.  Management periodically reviews accounts receivable and reduces thecarrying amount by a valuation allowance that reflects management’s bestestimate of the amount that may not be collectible.  Allowances foruncollectible accounts receivable are based on information available andhistorical experience.  As of March 31, 2007 and December 31, 2006, therewere $903,000 and $604,000, respectively of allowances for uncollectibleaccounts receivable.

Revenues fromcustomers which represented 10% or more of our sales for the three months endedMarch 31, 2007 and 2006 were as follows:
|                                      | ** ** | **For the three months ended** | ** ** |
|--------------------------------------|------------|----------------------------------------------------|------------|
| ** **                           | ** ** | **March 31,**                                 | ** ** |
| **Customer**                         | ** ** | **2007**                                           | ** ** | **2006** | ** ** |
| ** **                           | ** ** | **(% of total revenue)**            | ** ** |
| A — Exploration  and production |       | 36.2                                               | %          | — |   |
| B — Gathering  and Processing   |       | —                                             |       | 42.0 | % |
| C — Gathering  and Processing   |       | 35.7                                               | %          | 12.8 | % |
| D — Corporate                   |       | —                                             |       | 11.4 | % |

 

*Debt Issuance Costs and Discount onDebt*

We include debtissuance costs in other non-current assets.  These costs are associatedwith the senior subordinated convertible notes (“Notes”) we issued in March2006 and the senior secured debentures (“Debentures”) we issued in December2006.  The remaining unamortized debt issuance costs at March 31, 2007were $2,198,000 and are being amortized using the effective interest ratemethod over the life of the debt.

We initiallyreflected the  discount on the Debenturesof $4,326,000 on the balance sheet at December 31, 2006.  The remaining unamortized discount at March31, 2007 was $3,830,000 and is being amortized using the effective interestrate method over the life of the debt.

*Rocky Mountain Gas Inc. (“RMG”)Agreement*

On June 22, 2006,RMG filed an arbitration demand against us.  On August 22, 2006, we deniedRMG’s arbitration claims and asserted counterclaims against RMG.  Thearbitration is scheduled for May 2007.  At this time, we cannot predictthe outcome of arbitration.  However,management believes the outcome will not have a material adverse effect on ourfinancial condition.  (Refer to Part I, Item 3, Legal Proceedings to our2006 Annual Report on Form 10-K regarding the Rocky Mountain Gas Agreement andClaims Dispute.)  The 

5

----

accounts receivablebalance with RMG at March 31, 2007 was $995,000 and the associatedallowance for bad debt was $895,000. The increase of $299,000 in the allowancefor the quarter was related to reserving substantially all of the additionalcharges for the quarter under the prior agreements with RMG.

**Note 2—Recent Accounting Developments**

In June 2006, theFinancial Accounting Standards Board (“FASB”) issued Interpretation (“FIN”) No.48, *Accounting for Uncertainty in IncomeTaxes—an interpretation of FASB Statement No. 109, Accounting for Income Taxes*.  FIN No. 48 requires that realization of anuncertain income tax position must be “more likely than not” (i.e. greater than50% likelihood of receiving a benefit) before it can be recognized in thefinancial statements.  Further, thisinterpretation prescribes the benefit to be recorded in the financialstatements as the amount most likely to be realized assuming a review by taxauthorities having all relevant information and applying currentconventions.  FIN No. 48 also clarifiesthe financial statement classification of tax-related penalties and interestand sets forth new disclosures regarding unrecognized tax benefits.  FIN No. 48 is effective for fiscal yearsbeginning after December 15, 2006, and we adopted this interpretationeffective January 1, 2007.  See Note 6 —Income Taxes for further discussion.

In September 2006,the FASB issued SFAS No. 157, *FairValue Measurements*.  Thisstatement defines fair value, establishes a framework for measuring fair valueand expands disclosures about fair value measurements.  SFAS No. 157 will become effective forour fiscal year beginning January 1, 2008, and we will assess the potentialimpact of this Statement on our financial statements prior to that date.

In February 2007,the FASB issued SFAS No. 159, **The Fair Value Option for Financial Assets and FinancialLiabilities**, which permits an entity to measure certain financialassets and financial liabilities at fair value. The objective of SFAS No. 159is to improve financial reporting by allowing entities to mitigate volatilityin reported earnings caused by the measurement of related assets andliabilities using different attributes, without having to apply complex hedgeaccounting provisions. Under SFAS No. 159, entities that elect the fair valueoption (by instrument) will report unrealized gains and losses in earnings ateach subsequent reporting date. The fair value option election is irrevocable,unless a new election date occurs. SFAS No. 159 establishes presentation anddisclosure requirements to help financial statement users understand the effectof the entity’s election on its earnings, but does not eliminate disclosurerequirements of other accounting standards. Assets and liabilities that aremeasured at fair value must be displayed on the face of the balance sheet. ThisStatement is effective beginning January 1, 2008 , and we will assess thepotential impact of this Statement on our financial statements prior to thatdate.

**Note 3—Significant Contracts**

*Compressor Lease Agreement*

On February 12,2007, PRB Gathering, Inc. entered into a five-year lease agreement with J-WPower Company (“J-W”), effective January 24, 2007.  Under the termsof the agreement, J-W will supply us with gas compression equipment and relatedservices.  The compression equipment will service our gas gatheringpipelines in the Powder River Basin.

The lease meetsthe criteria under SFAS No. 13, *Accounting for Leases*,for classification as a capital lease on the balance sheet.  As a result,a capital lease asset of $3,050,000, which represents the estimated fair valueof the property was recorded in January 2007. The related liability is shown as a capital lease obligation of$3,069,000 on the balance sheet at March 31, 2007.  In addition, a cashpayment of $650,000 was made to J-W for future maintenance repairs inconnection with the lease.  The capital lease and prepayment will beamortized as expenses over the term of the lease.  Monthly lease paymentsranging from $100,000 to $150,000 will reduce the liability and also willinclude interest and executory (sales tax and environmental fees) expenses.

**Note 4—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 fairvalue of an asset retirement obligation is established when the long-livedasset is acquired, constructed and or 

6

----

completed, with acorresponding increase in the carrying value of the asset.  We depreciate the asset retirementobligations associated with our property and equipment, and deplete the amountsrecorded in respect to our oil and gas properties, and recognize accretionexpense, all over the estimated useful lives of the assets or remainingrecoverable reserves.

We estimate ourfuture retirement obligations based on our experience, management estimates andregulatory requirements.  We discount theestimated future obligations using an estimated credit adjusted risk-free rateat the time the obligation is incurred or revised.  Historically this rate has been estimated at8% to 10%.  The estimated obligations maybe revised due to changes in expected lives of gas wells, changes in gasgathering system configuration, changes in estimates and changes inregulations.

A reconciliationof our asset retirement obligation liability for the three months ended March31, 2007 and 2006, is as follows:
|                                                   | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------|------------|----------------------------------|------------|
| **(In thousands)**                           | ** ** | **March 31, 2007**     | ** ** | **March 31, 2006** | ** ** |
| Asset retirement  obligation, beginning of period |       | $                                | 3,140      |   | $ | 387 |   |
| Gathering assets                                  |       | 52                               |       | 69 |   |
| Proved  properties                                |       | (129                             | )          | 16 |   |
| Accretion  expense                                |       | 135                              |       | 9 |   |
| Asset retirement  obligation, end of period       |       | $                                | 3,198      |   | $ | 481 |   |

 

**Note5—Borrowings**

As of March 31, 2007 andDecember 31, 2006, our borrowings consisted of the following:
| (In thousands)                    | ** ** | **March 31, 2007** | ** ** | **December 31, 2006** | ** ** |
|----------------------------------------|------------|------------------------------|------------|---------------------------------|------------|
| ** **                             | ** ** | ** **                   | ** ** | ** **                      | ** ** |
| Senior  subordinated convertible notes |       | $                            | 21,965     |                            | $          | 21,965 |   |
| Senior secured  debentures             |       | 15,000                       |       | 15,000                          |       |
| Other term loans                       |       | 15                           |       | 17                              |       |
|                                   |       | 36,980                       |       | 36,982                          |       |
| Less current  portion                  |       | (10                          | )          | (10                             | )          |
| Total long-term  borrowings            |       | $                            | 36,970     |                            | $          | 36,972 |   |

 

***Senior Subordinated ConvertibleNotes (the “Notes”)***

In March 2006, weissued the Notes approximating a principal amount of $22 million in a privateplacement.  The Notes are secured by certain of our gas gathering assetsand mature 30 months from the date of issue.  The Notes bear interest at afixed rate of 10% per annum, payable quarterly in arrears from March 15,2006.  A registration statement applicable to the shares of common stockunderlying the Notes was filed in May 2006 and declared effective on June 21,2006.  The Notes do not contain any beneficial conversion features.

Debt issuancecosts of the Notes in the amount of approximately $1 million, excluding thevalue of warrants issued, were deferred as other non-current assets andare being amortized as interest expense.  For the quarter ended March 31,2007, $111,000 of the deferred costs of the Notes was amortized as interestexpense and an additional $549,000 of interest paid in cash was expensed.

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.  Inaddition, the Company is prohibited from declaring or paying cash dividends onthe common stock during the period that the Notes are outstanding and unpaid.

We followSFAS No. 133, and EITF 00-19, “*Accountingfor Derivative Financial Instruments Index to, and Potentially Settled in, aCompany’s Own Stock”* and the related pronouncements.  hawsehave evaluated the conversion feature embedded in the senior subordinatedconvertible Notes and the liquidated damages provision in the relatedregistration rights agreement and have determined that the entire amount ofthese securities is properly classified as long-term debt and are not accountedfor as derivatives on the consolidated balance sheet at March 31, 2007.

7

----

***Senior SecuredDebentures (the “Debentures”)***

In connection withthe December 2006 acquisition of the NE Colorado Field in the Niobraraformation, we entered into a Securities Purchase Agreement with two privatelenders.  Pursuant to that agreement, we issued to the lenders $15 millionin Debentures and 1,250,000 shares of common stock.

The Debentures arepayable on August 31, 2008 and bear interest at 13% per annum.  Interest payments are due quarterly inarrears.  Pursuant to the terms of aPledge and Security Agreement we entered into with the lenders, the Debenturesare collateralized by substantially all of our assets, except for certain excludedassets as described in the Pledge and Security Agreement.

Debt issuancecosts of the Debentures of $1,054,000 were deferred as other non-current assetsand are being amortized as interest expense. For the quarter ended March 31, 2007, $139,000 of the deferred costs ofthe Debentures was amortized as interest expense and an additional $481,000 ofinterest paid in cash was expensed.  Thediscount on the Debentures of $494,000 was amortized as interest expense duringthe current quarter.

**Note 6—Income Taxes**

A valuationallowance for deferred taxes at December 31, 2006 was $4.6 million.  As ofMarch 31, 2007, no change has been made on the balance sheet to reflect anydeferred tax asset, as management believes that this allowance amount continuedto be reasonable and appropriate.  Theeffective income tax rate was 37% for the first quarter of 2007 compared to 37%for the fourth quarter of 2006 and 37% for the first quarter of 2006.

In June 2006, theFASB issued FIN No. 48, “*Accounting for Uncertaintyin Income Taxes”*—*an interpretation of FASBStatement No. 109,**Accounting for IncomeTaxes*.  FIN No. 48 addressesthe determination of whether tax benefits claimed or expected to be claimed ona tax return should be recorded in the financial statements.  Under FIN No. 48, we may recognize the taxbenefit from an uncertain tax position only if it is more likely than not thatthe tax position will be sustained on examination by the taxing authorities,based on the technical merits of the position. The tax benefits recognized in the financial statements from such aposition should be measured based on the largest benefit that has a greaterthan fifty percent likelihood of being realized upon ultimate settlement.  FIN No. 48 also provides guidance onderecognition, classification, recognizing interest and penalties on incometaxes, accounting for taxes in interim periods, and it requires increaseddisclosures in financial statements.

We adopted theprovisions of FIN No. 48 effective January 1, 2007 and determined that therewas no adjustment required to retained earnings.  We recognize potential accrued interest andpenalties related to unrecognized tax benefits in income tax expense, which isconsistent with the recognition of these items in prior reporting periods.  No interest and penalties related to uncertaintax positions were accrued at March 31, 2007.

We have not hadany material changes to our unrecognized tax benefits since adoption, nor do weanticipate significant changes to the total amount of unrecognized tax benefitswithin the next 12 months.

As of January 1,2007, we remain subject to examination of our Federal and Colrado tax returnsfor the tax years 2004 through 2006.

**Note 7—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.  Inaccordance with our Option Plan, we reserve shares equal to 10% of our issuedand outstanding common stock for issuance under the Option Plan.  Our compensation committee may grant optionson such terms, including vesting and payment forms, as it deems appropriate inits discretion; however, no option may be exercised more than 10 years afterits grant, and the purchase price may not be less than 100% of the fair marketvalue of our common stock on the date of grant.

All options granted to date under the Option Plan have beengranted at exercise prices equal to or greater than the respective marketprices of our common stock on the grant dates. There were 77,949 shares available for grant under the Option Plan as ofMarch 31, 2007.

 

The following table summarizes activity for options:

8

----

 
|                            | ** ** | **Three Months Ended** | ** ** | **Three Months Ended** | ** ** |
|----------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                 | ** ** | **March 31, 2007**     | ** ** | **March 31, 2006**     | ** ** |
| ** **                 | ** ** | **Number of**               | ** ** | **Weighted Avg.**           | ** ** | **Number of** | ** ** | **Weighted Avg.** | ** ** |
| ** **                 | ** ** | **Shares**                       | ** ** | **Exercise Price**          | ** ** | **Shares** | ** ** | **Exercise Price** | ** ** |
| Outstanding at  January 1, |       | 617,250                          |       | $                                | 6.35       |   | 463,250 |   | $ | 6.74 |   |
| Granted                    |       | 202,500                          |       | 4.03                             |       | 239,750 |   | 6.51 |   |
| Forfeited                  |       | (37,500                          | )          | 7.06                             |       | (22,250 | ) | 8.57 |   |
| Exercised                  |       | —                           |       | —                           |       | — |   | — |   |
| Outstanding at  March 31,  |       | 782,250                          |       | $                                | 5.71       |   | 680,750 |   | $ | 6.60 |   |
| Exercisable at March  31,  |       | 371,063                          |       | $                                | 5.76       |   | 297,500 |   | $ | 6.53 |   |

 

As of March 31,2007, the weighted average fair value of options granted during the previousthree months was $2.04, the weighted average remaining contractual life for theoptions outstanding is 6.5 years and the weighted average remaining contractuallife for the options exercisable is 3.0 years. The fair value of each option granted is estimated on the date of grantusing the Black-Scholes option pricing model.

The Black-Scholesoption valuation model was developed for use in estimating the fair value oftraded options that have no vesting restrictions and are fullytransferable.  In addition, optionvaluation models incorporate highly subjective assumptions including theexpected stock price volatility.  Ourstock options have characteristics significantly different from those of tradedoptions and, as changes in the subjective input assumptions can materiallyaffect the fair value estimate, it is management’s opinion that the valuationsas determined by the existing models are different from the value that the optionswould realize if traded in the market.

We used thefollowing assumptions to estimate the fair value of options granted for thethree months ended March 31, 2007 and 2006:
|                                   | ** ** | **SFAS No. 123(R) Expense** | ** ** | **SFAS No. 123 Pro-Forma** |
|-----------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|
| ** **                        | ** ** | **Three Months Ended**           | ** ** | **Three Months Ended**          |
| ** **                        | ** ** | **March 31, 2007**                    | ** ** | **March 31, 2006**                   |
| Expected life of  options         |       | 2.4 — 6.5 years                       |       | 2.5 – 6.25 years                     |
| Expected  volatility              |       | 70%                                        |       | 80%                                       |
| Risk-free  interest rate          |       | 4.81 — 5.00%                          |       | 4.31 — 4.69%                         |
| Expected  dividend yield of stock |       | 0%                                         |       | 0%                                        |

 

**Note 8 — 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 have defined two reportable segments,described below, based on factors such as how we manage operations and how thechief operating decision makers view results. We consider our chief executive officer and our chief operating officeras our chief operating decision makers.

***Gas Gathering and Processing Segment***

We own and operategas gathering and processing systems we acquired from 2004 through March 31,2007.  We charge a fee to our customersfor these services based on volumes of gas transported, based on a monthlyminimum fee and/or based on the level of compression services provided.  We have acquired gas gathering contracts thatinclude operating leases with respect to surface-use rights that are cancelablein the event that gas gathering activities cease as a result of decliningproduction.  We also have cancelablepurchase commitments with third party providers for future field operations,equipment and maintenance activities.

9

----

***Oil and Gas Exploitation and Production Segment***

Beginning in thethird quarter of 2005, we commenced operations in the exploitation andproduction segment.  Our operations inthis segment include developing, producing and marketing natural gas fromcoal-bed methane wells.  Our exploitationand production segment currently operates in the Powder River Basin area ofWyoming and the Denver-Julesburg (“D-J”) Basin in Colorado.

Through amanagement services agreement during the first half of 2006 with Rocky MountainGas (“RMG”), we earned management fee revenues that we have included under“Corporate” in the following table that details the performance of oursegments.  We terminated this agreement with RMG as of June 30, 2006.
|                              | ** ** | **Three Months Ended March 31, 2007** | ** ** |
|------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                   | ** ** | **Exploitation**                                               | ** ** | **Gathering** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                   | ** ** | **and**                                                        | ** ** | **and** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **(In thousands)**      | ** ** | **Production**                                                 | ** ** | **Processing** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| Revenues                     |       | $                                                              | 413        |   | $ | 508 |   | $ | 4 |   | $ | 925 |   |
| Net loss                     |       | $                                                              | (556       | ) | $ | (539 | ) | $ | (3,335 | ) | $ | (4,430 | ) |
| Identifiable  assets:        |       |                                                           |       |   |   |   |   |   |   |
| Oil and gas  properties, net |       | $                                                              | 21,425     |   | $ | — |   | $ | — |   | $ | 21,425 |   |
| Property and  equipment, net |       | $                                                              | —     |   | $ | 11,730 |   | $ | 701 |   | $ | 12,431 |   |
| Other  non-current assets    |       | $                                                              | 1,195      |   | $ | 963 |   | $ | 1618 |   | $ | 3,776 |   |

 
|                              | ** ** | **Three Months Ended March 31, 2006** | ** ** |
|------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                   | ** ** | **Exploitation**                                               | ** ** | **Gathering** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                   | ** ** | **and**                                                        | ** ** | **and** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **(In thousands)**      | ** ** | **Production**                                                 | ** ** | **Processing** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| Revenues                     |       | $                                                              | 58         |   | $ | 675 |   | $ | 94 |   | $ | 827 |   |
| Net loss                     |       | $                                                              | (134       | ) | $ | (203 | ) | $ | (1,157 | ) | $ | (1,494 | ) |
| Identifiable  assets:        |       |                                                           |       |   |   |   |   |   |   |
| Oil and gas  properties, net |       | $                                                              | 2,893      |   | $ | — |   | $ | — |   | $ | 2,893 |   |
| Property and  equipment, net |       | $                                                              | —     |   | $ | 7,180 |   | $ | 203 |   | $ | 7,383 |   |
| Other non-current  assets    |       | $                                                              | —     |   | $ | 1,115 |   | $ | 1,079 |   | $ | 2,194 |   |

 

**Note 9— Related Party Transactions**

In October 2005,the Company and JMG Exploration, Inc. (“JMG”) entered into an agreement tobuild and operate an oil and gas pipeline. Joseph Skeehan and Reuben Sandler were directors on the Company’s Boardand also served on the board of directors of JMG during 2005.  Both of them have continued to serve on theCompany’s Board of Directors through the current period.  In January 2006, this project wasterminated.  In order to reimburse us forits carrying cost of the pipe, we and JMG entered into an agreement whereby JMGwould indemnify us for these costs and resale of the pipe.  The interest rate applied was 10% per annumbased on the remaining balance for the pipe that was held in inventory.  The pipe inventory was sold during 2006 andthe proceeds were received by the Company and credited to the inventoryaccount.  As of March 31, 2007, JMG owedus $107,000 for interest on the pipe inventory balance.  This amount was subsequently paid by JMG inMay 2007.

Susan Wright, wifeof the Company’s CEO, provides Corporate Secretary services to us on a contractbasis.  During the quarter ended March31, 2007, Ms. Wright was paid $34,200 for the contract services.

On January 9,2007, we issued 15,000 warrants to a former director for servicesrendered.  These warrants vestimmediately on the date of grant with an exercise price of $4.50 per share.  We recorded approximately $20,000 as theestimated fair value of the warrants as stock-based compensation, with acorresponding increase in additional paid-in-capital.

One of ourofficers (and a director) and three of our directors, in the aggregate,purchased $100,000 and a total of $1,275,000, respectively, of the Notes thatwere issued in the first quarter of 2006. During the quarter ended March 31, 2007, we paid interest of $2,500 and$31,875, respectively, on these Notes. In addition, an 

10

----

investment fund, of whichone of our former directors is a consultant, purchased on behalf of itsinvestors, $1 million of the Notes.  Theinvestors were paid $25,000 in interest during the same period.

**Note 10 —Subsequent Events**

***Registration ofAdditional Shares of PRB Energy, Inc. Common Stock***

In connection withour issuance of 1,250,000 shares of common stock to two private lenders inDecember 2006, we entered into a registration rights agreement.  We fileda registration statement to register those shares in February 2007.  The registration was declared effective bythe SEC on May 4, 2007.

***Formation of NewSubsidiary***

PRB North Dakota,Inc., a new subsidiary of PRB Energy, was formed in April 2007.

**ITEM*2.    * MANAGEMENT’SDISCUSSION 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.

**Statement of Forward-LookingStatements**

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.  These statements identify prospectiveinformation.  Important factors couldcause actual results to differ, possibly materially, from those in theforward-looking statements.  In somecases you can identify forward-looking statements by words such as“anticipate,” “believe,” “could,” “estimate,” “expect,” “plan,” “intend,”“may,” “should,” “will” and “would” or other similar words.  You should read statements that contain thesewords carefully because they discuss our future expectations, containprojections of our future results of operations or of our financial position,or state other “forward-looking” information. We believe that it is important to communicate our future expectationsto our investors.  There may, however, beevents in the future that we are not able to accurately predict orcontrol.  These forward-lookingstatements are subject to a number of risks, uncertainties and assumptions,including those listed under item 1A “Risk Factors” in our Annual Report onForm 10-K for the year ended December 31, 2006.

We undertake noobligation to update publicly or revise any forward-looking statements.  You should not rely upon forward-lookingstatements as predictions of future events or performance.  We cannot assure you that the events andcircumstances reflected in the forward-looking statements will be achieved oroccur.  Although we believe that the expectationsreflected in the forward-looking statements are reasonable, we cannot guaranteefuture results, levels of activity, performance or achievements.

You should readthe following discussion in conjunction with the financial statements andrelated notes in Part I, Item 1 of this Quarterly Report on Form 10-Q and inour Annual Report on Form 10-K for the year ended December 31, 2006.

**General Overview**

We are anindependent energy company engaged in the acquisition, exploitation,development and production of natural gas and oil.  In addition, we provide gas gathering,processing and compression services for properties we operate and forthird-party producers.  Through June 30,2006, we also provided contract management services by operating certain propertiesfor a third party and providing technical and administrative support for thoseproperties.  We were initially formedunder the name “PRB Transportation, Inc.” in December 2003 and wereincorporated in the State of Nevada.  OnJune 14, 2006, our name was changed to “PRB Energy, Inc.”  We conduct our primary business activities inWyoming, Colorado, and Nebraska.  We operate through two wholly-ownedsubsidiaries:  PRB Oil and Gas, Inc., anoil and gas exploitation and production company and PRB Gathering, Inc., agathering and processing company.

11

----

**First Quarter 2007 Operational andFinancial Highlights**

During the first quarter of 2007 we had 108 gross wells (102 net)producing commercial gas, as well as 64 gross wells (50 net) in the dewateringstage.  We sold 76,000 Mcf of gas inWyoming and 21,000 Mcf of gas in northern Colorado, which resulted in sales of$321,000 and $92,000, respectively.  Ourgathering operations generated revenues of $508,000 for the first quarter of 2007.

For the first quarter of 2007, we had a net loss of $4.4 million.  Approximately half of this loss was due tointerest expense related to the debt incurred in 2006.  Interest expense for the quarter consisted ofthree main categories.  The first categoryis $280,000 of interest expense associated with a capital leaseobligation.  The second category consistsof discount and issuance costs related to the Debentures amortized for$635,000.  The last category was theinterest payments for the Notes and the Debentures of $1,065,000. (SeePart I, Note 5 in this Quarterly Report on Form 10-Q.)

The balance of the net loss for the quarter was primarily due to theinability to gather gas due to weather and mechanical problems.  The weather problems affected the SouthGillette, Wyoming area from mid-January through early February due to waterfreezing in the gathering lines.  Also, areciprocating compressor had mechanical problems interrupting gas gatheringoperations for the last three weeks of March 2007.  These problems were coupled with a lower thanaverage realized price for the quarter.

We entered into afive-year lease agreement with J-W Power Company (“J-W Power”) effectiveJanuary 24, 2007.  Under the terms of the agreement, J-W Power willsupply us with gas compression equipment and related services.  Thecompression equipment will service our gas gathering pipelines in the PowderRiver Basin.  The lease meets thecriteria under SFAS No.13, “*Accounting for Leases”*,for classification as a capital lease on the balance sheet.  As a result,a capital lease asset of $3,050,000 was recorded, as well as the relatedliability.  In addition, a cash payment of $650,000 was made to J-W Powerfor future maintenance repairs in connection with the lease.  The capitallease and prepayment will be amortized over the term of the lease.

**Results of Operations**

The financialinformation with respect to the three months ended March 31, 2007 and 2006,which is discussed below, is unaudited. In the opinion of management, suchinformation contains all adjustments, consisting only of normal recurringaccruals, necessary for a fair presentation of the results for such periods.The results of operations for interim periods are not necessarily indicative ofthe results of operations for the full fiscal year.

12

----

***Three months ended March 31, 2007 (unaudited) compared tothe three months ended March 31, 2006 (unaudited)***
|                                           | ** ** | ** **                                 | ** ** | ** **     | ** ** | **Increase /**       | ** ** | **Percentage**            | ** ** |
|-------------------------------------------|------------|--------------------------------------------|------------|----------------|------------|---------------------------|------------|---------------------------|------------|
| ** **                                | ** ** | **Quarter Ended March 31,** | ** ** | **(Decrease)** | ** ** | **Change**                | ** ** |
| ** **                                | ** ** | **2007**                                   | ** ** | **2006**       | ** ** | **2007 v 2006** | ** ** | **2007 v 2006** | ** ** |
| ** **                                | ** ** | **(Dollars in thousands)**       | ** ** |
| **Revenue**                               | ** ** | ** **                                 | ** ** | ** **     | ** ** | ** **                | ** ** | ** **                | ** ** |
| Natural gas  sales                        |       | $                                          | 413        |           | $          | 58                        |       | $                         | 355        |   |   | * |
| Gas gathering  and processing             |       | 508                                        |       | 675            |       | (167                      | )          | -25                       | %          |
| Other                                     |       | 4                                          |       | 94             |       | (90                       | )          | -96                       | %          |
| Total revenue                             |       | 925                                        |       | 827            |       | 98                        |       | 12                        | %          |
| Natural gas  gathering expenses and taxes |       | (96                                        | )          | (19            | )          | (77                       | )          |                      | *          |
| **Net revenue**                           | ** ** | **829**                                    | ** ** | **808**        | ** ** | **21**                    | ** ** | **3**                     | **%**      |
| **Operating  expenses**                   | ** ** | ** **                                 | ** ** | ** **     | ** ** | ** **                | ** ** | ** **                | ** ** |
| Natural gas  lease operating              |       | 661                                        |       | 59             |       | 602                       |       |                      | *          |
| Gas gathering  and processing operations  |       | 432                                        |       | 588            |       | (156                      | )          | -27                       | %          |
| General and administrative                |       | 1,601                                      |       | 1,017          |       | 584                       |       | 57                        | %          |
| Depreciation,  depletion and amortization |       | 855                                        |       | 320            |       | 535                       |       | 167                       | %          |
| Exploration  expense                      |       | —                                     |       | 97             |       | (97                       | )          | -100                      | %          |
| **Total expenses**                        | ** ** | **3,549**                                  | ** ** | **2,081**      | ** ** | **1,468**                 | ** ** | **71**                    | **%**      |
| **Operating  loss**                       | ** ** | **(2,720**                                 | **)**      | **(1,273**     | **)**      | **(1,447**                | **)**      | **114**                   | **%**      |
|                                      |       |                                       |       |           |       |                      |       |                      |       |
| Other income  (expense)                   |       |                                       |       |           |       |                      |       |                      |       |
| Interest and other income                 |       | 271                                        |       | 187            |       | 84                        |       | 45                        | %          |
| Interest (expense) income, net            |       | (1,981                                     | )          | (408           | )          | (1,573                    | )          |                      | *          |
| **Net  loss**                             | ** ** | **$**                                      | **(4,430** | **)**          | **$**      | **(1,494**                | **)**      | **$**                     | **(2,936** | **)** | **-197** | **%** |

 

----

*—Percentages greater than 200% and comparisons frompositive to negative values are not shown.

***Revenues***

Total revenuesincreased $98,000, or 12%, for the quarter ended March 31, 2007 compared tolast year’s first quarter as the result of natural gas sales from the Pennacoproperties acquired in mid 2006.  The$355,000 increase in natural gas sales was substantially offset by the reducedgas gathering fees from third parties as a result of the reduction of revenuesthat were previously Pennaco third-party fees. We also had management fee revenues during the first quarter of 2006,but none in 2007, because the Rocky Mountain Gas, Inc. (“RMG”) agreement endedon June 30, 2006.  (See Part II, Item 1in this Quarterly Report on Form 10-Q.)

***Natural Gas LeaseOperating Expenses***

Natural gas leaseoperating expenses in 2007 increased to $661,000, ten times over 2006 as aresult of the added field operations from the Pennaco (Wyoming) and D-J Basin(Colorado/Nebraska) acquisitions in the second half of 2006.

***Gas Gathering andProcessing Operations Expenses***

Gas gathering andprocessing operations expenses were 27% lower in 2007 than last year primarilydue to the J-W Power arrangement for the leasing of compressors and in reducedthird-party gathering services.

***General andAdministrative Expenses***

General andadministrative expenses had a significant increase of $584,000, or 57%, due to(1) employee compensation and benefits increasing over last year as a result ofsubstantial increases (from 15 to 27) in the 

13

----

number of employees addedin response to increased operations, and (2) a reserve for bad debt in thecurrent quarter of nearly $300,000 for the RMG receivable. (See Part I, Note 1in this Quarterly Report on Form 10-Q.)

***Depreciation,depletion, amortization, and impairments (“DD&A”)***

DD&A expensein 2007 increased to $855,000, nearly double over 2006 resulted from theacquired properties in mid and late 2006.

***Other Income andExpense***

Interest expensein 2007 increased to $2 million, nearly 5 times over 2006 due to (1) interestpayments on convertible Notes, Debentures and capital lease and (2)amortization of the debt issuance costs and the discount on Debentures.

**Liquidityand Capital Resources**

***Cash Flows andCapital Expenditures***

At March 31, 2007,cash and cash equivalents totaled $6,917,000 compared to $11,157,000 atDecember 31, 2006. Additionally, we have $3,117,000 of restricted cash whichcollateralizes a reducing letter of credit issued in connection with potentialplugging liabilities of acquired properties in 2006.  Of this amount, $1 million is classified as anon-current asset in the balance sheet. The restricted cash will be released at the same rate annually that theletter of credit is reduced.  Workingcapital, excluding the restricted cash, was $7,211,000.  During the first quarter of 2006, we raisedapproximately $22 million, before expenses, by issuing the Notes.  These funds have provided working capital forour exploitation, development and asset acquisition programs.  During the fourth quarter of 2006, we raisedapproximately $15 million, before expenses, by issuing the Debentures.  These funds were utilized in the acquisition ofproperties in the D-J Basin and are for further development of the area.

We believe that our cash and cash equivalents on hand,internally generated cash flows and future financing activities will requireaugmentation from bank financing or other equity of debt financing to fund ourplanned operational, drilling and acquisition and capital expenditures in thenear future.  The amount and allocationof future capital and exploitation expenditures will depend upon a number offactors including the number and size of acquisitions and drillingopportunities, our cash flows from operating and financing activities and ourability to assimilate acquisitions. Also, the impact of oil and gas prices on investment opportunities, theavailability of capital and borrowing facilities and the success of ourexploitation and development activities could lead to changes in fundingrequirements for future development.  Ifwe failed to secure third party financing for the future development, we wouldpursue other financial arrangements through joint venture partners, farm-outagreements or the sale of assets.

*Cash Flow Used in OperatingActivities*

During the threemonths ended March 31, 2007, our net loss of $4,430,000 included non-cashcharges of $855,000 of DD&A expense, $258,000 of share-based compensationexpense, $299,000 of bad debt reserve, and $744,000 of interest expenseresulting from amortization of debt issuance costs and discount on theDebentures.

Cash used inoperating activities of $3,011,000 during the first three months of 2007 was83% greater than the same period of 2006. This increase was mainly attributable to increased debt interestpayments, higher general and administrative expenses due to staff increases andincreased operations of acquired and developed gas properties.

*Cash Flow Used in InvestingActivities*

Cash used ininvesting activities was $1,117,000 during the first three months of 2007,representing an decrease of 63% compared to 2006.  During the currentquarter of 2007, we invested $900,000 in drilling and completion activities todevelop proved properties and $208,000 for other surface plant and equipment.

14

----

At March 31, 2007,capitalized costs of wells in progress were approximately $6,511,000 andconsisted of 64 gross (50 net) wells in various stages ofcompletion.  None of these wells are in an area requiring majorcapital expenditures before production may begin, nor were any of these wellscompleted more than one year ago.  These wells are drilling, beingcompleted or are undergoing de-watering processes.  We believe that afterthe wells have been de-watered, we will be able to commence production.

Currently, our2007 capital expenditure program calls for investing approximately $18 millionin oil and gas exploration, development and acquisition projects and gasgathering system projects. During the first quarter of 2007, we expendedapproximately $1.1 million for such projects.

*Cash Flow from Financing Activities*

Cash used byfinancing activities of $112,000 for the three months ended March 31,2007.  During the first quarter of 2006, we raised $21,965,000 from theissuance of Notes and incurred approximately $1,000,000 in debt issuance costs,excluding the value of warrants issued.  During the fourth quarter of2006, we raised $15 million from the issuance of Debentures and incurred debtissuance costs of approximately $112,000 and $900,000, respectively, during thefirst quarter of 2007 and the fourth quarter of 2006.

*Off Balance-Sheet Arrangements**.***

We do not have anyoff-balance sheet financing arrangements as of March 31, 2007, except for ourStorm Cat gas gathering services agreement (“Agreement”).  The Agreementrequires Storm Cat to pay us gas gathering fees on specific minimum volumes ofgas, whether or not those volumes are delivered and transported through oursystem.  The Agreement has a 10-year term, with certain minimumpayments during the first 3 years of the Agreement.  The Agreement allowsfor a cash true-up payment at each year-end if the annual volume commitmentunder the Agreement is not met. The amount billed under the agreement for thefirst quarter of 2007 was $229,000.

**CriticalAccounting Policies and Estimates**

We refer you tothe corresponding section in Part II, Item 7 of our 2006 Annual Report on Form10-K, and to the footnote disclosures included in Part 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“Quantitative and Qualitative Disclosures about Market Risk” in Item 7A ofour Annual Report on Form 10-K for the fiscal year ended December 31,2006.

**ITEM 4:***   ***CONTROLS AND PROCEDURES**

We maintaindisclosure controls and procedures as defined in Section 13 a - 15 (e) and 15 d- 15 (e) of the Securities Exchange Act of 1934 designed to provide reasonableassurance that information required to be disclosed in our reports is recorded,processed, summarized and reported within the time periods specified in theSEC’s rules and forms, and that such information is accumulated andcommunicated to our management, including our Chief Executive Officer andPrincipal Financial Officer, to allow timely decisions regarding requireddisclosure.  Our management, with theparticipation and oversight of our Chief Executive Officer and PrincipalFinancial Officer, evaluated the design and effectiveness of our disclosurecontrols and procedures as of March 31, 2007.  Based on this evaluation, our Chief ExecutiveOfficer and our Principal Financial Officer have concluded that our disclosurecontrols and procedures were effective, as of March 31, 2007.

15

----

**PART II OTHER INFORMATION**

**ITEM1:    LEGAL PROCEEDINGS**

Rocky Mountain GasInc. (“RMG”) filed an arbitration demand against us in 2006.  Thearbitration is scheduled for May 2007.  (Refer to Part I, Item 3 in. our2006 Annual Report on Form 10-K regarding the Rocky Mountain Gas Agreement andClaims Dispute.)

**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 2006 Annual Report on Form 10-K.  See also “Forward-Looking Statements”included in Part I, Item 2 of this Quarterly Report on Form 10-Q.

16

----

**ITEM6:    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).                                                                                                                  |
| (3.3)           |       | 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).                                                                                                                                    |
| (4.5)           |       | Form of 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 on annual Form 10-K filed 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 on annual Form 10-K filed on April 14, 2006 and  incorporated by reference herein).                                         |
| (4.8)           |       | Form of Senior Secured Debentures (filed as and  exhibit to From 8-K filed on January 5, 2007 and incorporated by reference  herein)                                                                                                                                                 |
| (4.9)           |       | Pledge and Security Agreement, dated as of December  28, 2006, by and among PRB Energy, Inc., PRB Oil & Gas, Inc., PRB Gathering,  Inc., and the Secured Parties named therein (filed as and exhibit to From 8-K  filed on January 5, 2007 and incorporated by reference herein) |
| (4.10)          |       | Secured Guaranty, dated as of December 28, 2006,  made by PRB Energy, Inc. and PRB Gathering, Inc. (filed as an exhibit to From  8-K filed on January 5, 2007 and incorporated by reference herein)                                                                                  |
| (4.11)          |       | Registration Rights Agreement, dated as of December  28, 2006, by and among PRB Energy, Inc. and the Buyers named therein (filed  as an exhibit to From 8-K filed on January 5, 2007 and incorporated by  reference herein)                                                          |
| (10.22)         |       | Master Gas Compression Contract, dated  February 12, 2007, by and between PRB Gathering, Inc. and J-W Power  Company (filed as and exhibit to From 8-K filed on February 14, 2007 and incorporated  by reference herein)                                                        |
| 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 and Principal Financial  Officer Certifications 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 are provided as part ofthis electronic submission.

()               Previously filed.

17

----

**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: May 14, 2007

18

----