**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**Form 10-Q/A**

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

 

**For thequarterly period ended June 30, 2005**

 

**or**

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

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

 

**Commission File Number 333-120129**

 

**PRB Gas Transportation, Inc.**

(Exact name of registrant as specified inits charter)

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

** **

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

 

**n/a**

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

 

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

 

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

 

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

 

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

 

As of August 13, 2005, the registrant had7,055,894 shares of common stock outstanding.

 

 

----

 

**TABLE OF CONTENTS**

 

 
| ** **        | ** **                                                                                  | ** ** |
|-------------------|---------------------------------------------------------------------------------------------|------------|
| **PART I.**       | **FINANCIAL  INFORMATION**                                                                  |       |
| ** **        | ** **                                                                                  |       |
| Item 1.           | Financial Statements:                                                                       |       |
|              |                                                                                        |       |
|              | Balance Sheets  as of June 30, 2005 and December 31, 2004                                   |       |
|              |                                                                                        |       |
|              | Statements of  Operations for the three months and six months ended June 30, 2005 and 2004  |       |
|              |                                                                                        |       |
|              | Statements of  Changes in Stockholders’ Equity for the six months, ended June 30, 2005 |       |
|              |                                                                                        |       |
|              | Statements of  Cash Flows for the six months ended June 30, 2005 and 2004                   |       |
|              |                                                                                        |       |
|              | Notes to  Unaudited Financial Statements                                                    |       |
|              |                                                                                        |       |
| Item 2.           | Management’s Discussion and  Analysis of Financial Condition and Results of Operations |       |
|              |                                                                                        |       |
| Item 3.           | Quantitative and Qualitative  Disclosure About Market Risk                                  |       |
|              |                                                                                        |       |
| Item 4.           | Controls and Procedures                                                                     |       |
|              |                                                                                        |       |
| **PART II.** | **OTHER INFORMATION**                                                                       |       |
| ** **        | ** **                                                                                  |       |
| Item 1.           | Legal Proceedings                                                                           |       |
|              |                                                                                        |       |
| Item 2.           | Changes in Securities, Use  of Proceeds and Issuer Purchases of Equity Securities           |       |
|              |                                                                                        |       |
| Item 3.           | Defaults Upon Senior  Securities                                                            |       |
|              |                                                                                        |       |
| Item 4.           | Submission of Matters to a  Vote of Security Holders                                        |       |
|              |                                                                                        |       |
| Item 5.           | Other Information                                                                           |       |
|              |                                                                                        |       |
| Item 6.           | Exhibits                                                                                    |       |
|              |                                                                                        |       |
|              | Signatures                                                                                  |       |

 

----

 

**PART I FINANCIAL INFORMATION**

 

**Item 1.  FinancialStatements**

 

This Form 10-Q/A for the quarterly period ended June 30, 2005 is beingfiled for the purpose of restating PRB Gas Transportation, Inc.’s. unauditedfinancial statements as of and for the three months and six months ended June30, 2005. The Company acquired a contract effective August 2004.  During June 2005 the Company determined thatit had incorrectly invoiced this customer for the period August 2004 throughApril 2005.  The original invoices forthis period did not take into account that the agreement includes a minimumcontract billing provision.  The Companyinvoiced the customer for the difference between the original invoices and thecorrected invoices in June 2005.  TheCompany was not able to determine whether the customer would pay the differencedue and as such did not restate its financial statements until collection wasassured. The customer paid the Company for the difference due (approximately$304 thousand) during December 2005, including approximately $36 thousand and$142 thousand in respect to the three months and six months ended June 30,2005, respectively. Accordingly, the Company has restated its financialstatements.

Conforming changes have been made to the notes to the financialstatements and management’s discussion and analysis of financial condition andresults of operations included in the following 10-Q/A. See Note 2 in the notesto the unaudited financial statements for further information on thisrestatement. This Form 10-Q/A has not been updated for events or informationsubsequent to the filing of the original Form 10-Q except in relation to theforegoing. Accordingly, this Form 10-Q/A should be read in conjunction with theCompany’s filings made with the SEC subsequent to the filing of the originalForm 10-Q.

 

1

----

 

**PRB Gas Transportation, Inc.**

**BalanceSheets**

 
| ** **                                                                                                              | ** ** | **June 30, 2005**             | ** ** | **December 31, 2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|-----------------------|------------|
| ** **                                                                                                              | ** ** | **(Unaudited)**               | ** ** | ** **            | ** ** |
| ** **                                                                                                              | ** ** | **(as Restated, see Note 2)** | ** ** |
| **Assets**                                                                                                              | ** ** | ** **                    | ** ** | ** **            | ** ** |
| Current  assets                                                                                                         |       |                          |       |                  |       |
|                                                                                                                    |       |                          |       |                  |       |
| Cash and cash equivalents                                                                                               |       | $                             | 9,000,100  |                  | $          | 320,150 |   |
| Accounts receivable                                                                                                     |       | 608,480                       |       | 423,540               |       |
| Accrued interest receivable                                                                                             |       | 32,640                        |       | —                |       |
| Prepaid expenses                                                                                                        |       | 167,333                       |       | 103,760               |       |
| Total current assets                                                                                                    |       | 9,808,553                     |       | 847,450               |       |
|                                                                                                                    |       |                          |       |                  |       |
| Property and  equipment, net                                                                                            |       | 7,781,830                     |       | 8,136,203             |       |
|                                                                                                                    |       |                          |       |                  |       |
| Other  non-current assets                                                                                               |       |                          |       |                  |       |
| Deferred costs of raising capital                                                                                       |       | —                        |       | 267,068               |       |
| Deposits                                                                                                                |       | 24,381                        |       | 3,517                 |       |
| Contracts, net                                                                                                          |       | 2,030,207                     |       | 2,145,240             |       |
| Total other non-current assets                                                                                          |       | 2,054,588                     |       | 2,415,825             |       |
|                                                                                                                    |       |                          |       |                  |       |
| Total assets                                                                                                            |       | $                             | 19,644,971 |                  | $          | 11,399,478 |   |
|                                                                                                                    |       |                          |       |                  |       |
| **Liabilities and Stockholders’ Equity**                                                                           |       |                          |       |                  |       |
|                                                                                                                    |       |                          |       |                  |       |
| Current  liabilities                                                                                                    |       |                          |       |                  |       |
| Accounts payable                                                                                                        |       | $                             | 199,863    |                  | $          | 137,991 |   |
| Accrued property taxes                                                                                                  |       | 33,897                        |       | 4,000                 |       |
| Other accrued expenses and other current  liabilities                                                                   |       | 54,453                        |       | 15,205                |       |
| Accrued TOP acquisition costs                                                                                           |       | 15,287                        |       | 200,000               |       |
| Dividends payable                                                                                                       |       | —                        |       | 133,683               |       |
| Compressor disposal liability                                                                                           |       | 25,000                        |       | 25,000                |       |
| Note payable                                                                                                            |       | —                        |       | 1,500,000             |       |
| Total current liabilities                                                                                               |       | 328,500                       |       | 2,015,879             |       |
|                                                                                                                    |       |                          |       |                  |       |
| Asset  retirement obligation                                                                                            |       | 67,396                        |       | 64,804                |       |
| Total liabilities                                                                                                       |       | 395,896                       |       | 2,080,683             |       |
|                                                                                                                    |       |                          |       |                  |       |
| Commitments  and Contingencies                                                                                          |       |                          |       |                  |       |
|                                                                                                                    |       |                          |       |                  |       |
| Stockholders’  equity                                                                                              |       |                          |       |                  |       |
| Capital, 50,000,000 shares authorized, par  value $0.001, 5,639,000 shares undesignated                                 |       |                          |       |                  |       |
| Series A 10% Convertible Preferred,  2,400,000 shares authorized and issued, 0 and 2,400,000 outstanding,  respectively |       | —                        |       | 2,400                 |       |
| Series B 5% Convertible Preferred,  1,550,000 shares authorized and issued, 0 and 1,550,000 outstanding,  respectively  |       | —                        |       | 1,550                 |       |
| Series C Convertible Preferred, 411,000  shares authorized, issued and outstanding                                      |       | 411                           |       | 411                   |       |
| Common stock, 40,000,000 shares authorized,  7,850,000 issued, 7,050,000 and 800,000 outstanding, respectively          |       | 7,850                         |       | 1,600                 |       |
| Treasury stock                                                                                                          |       | (800,000                      | )          | (800,000              | )          |
| Additional paid-in-capital                                                                                              |       | 21,296,542                    |       | 10,763,372            |       |
| Accumulated deficit                                                                                                     |       | (1,255,728                    | )          | (650,538              | )          |
| Total stockholders’ equity                                                                                         |       | 19,249,075                    |       | 9,318,795             |       |
|                                                                                                                    |       |                          |       |                  |       |
| Total  liabilities and stockholders’ equity                                                                        |       | $                             | 19,644,971 |                  | $          | 11,399,478 |   |

 

Theaccompanying notes are an integral part of these unaudited financialstatements.

 

2

----

 

**PRB Gas Transportation, Inc.**

**Statementsof Operations**

**(Unaudited)**

 
| ** **                                             | ** ** | **Three  Months Ended June 30,** | ** ** | **Six  Months Ended June 30,** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                             | ** ** | **2005**                         | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                             | ** ** | **(as  Restated, see Note 2)**   | ** ** | ** **                     | ** ** | **(as  Restated, see Note 2)** | ** ** | ** ** | ** ** |
| Gas gathering  revenues:                               |       |                             |       |                           |       |   |   |   |   |
| Related party                                          |       | $                                | —     |                           | $          | 228,754 |   | $ | — |   | $ | 499,768 |   |
| Third party                                            |       | 714,621                          |       | 114,127                        |       | 1,555,678 |   | 242,024 |   |
| Total revenue                                          |       | 714,621                          |       | 342,881                        |       | 1,555,678 |   | 741,792 |   |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Expenses:                                              |       |                             |       |                           |       |   |   |   |   |
| Operating                                              |       | 384,202                          |       | 221,355                        |       | 874,994 |   | 440,125 |   |
| Depreciation and  amortization                         |       | 279,540                          |       | 84,097                         |       | 556,994 |   | 167,733 |   |
| General and  administrative                            |       | 466,296                          |       | 172,560                        |       | 727,799 |   | 261,515 |   |
| Total expenses                                         |       | 1,130,038                        |       | 478,012                        |       | 2,159,787 |   | 869,373 |   |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Operating loss                                         |       | (415,417                         | )          | (135,131                       | )          | (604,109 | ) | (127,581 | ) |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Other income  (expense):                               |       |                             |       |                           |       |   |   |   |   |
| Interest income                                        |       | 47,832                           |       | 9,022                          |       | 48,060 |   | 12,685 |   |
| Miscellaneous  income                                  |       | —                           |       | 253                            |       | 300 |   | 253 |   |
| Interest expense                                       |       | (7,436                           | )          | —                         |       | (49,441 | ) | — |   |
| Total other  income (expense)                          |       | 40,396                           |       | 9,275                          |       | (1,081 | ) | 12,938 |   |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Net loss                                               |       | (375,021                         | )          | (125,856                       | )          | (605,190 | ) | (114,643 | ) |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Convertible  preferred stock dividends                 |       | (22,461                          | )          | (154,063                       | )          | (204,806 | ) | (258,459 | ) |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Net loss  applicable to common stock                   |       | $                                | (397,482   | )                              | $          | (279,919 | ) | $ | (809,996 | ) | $ | (373,102 | ) |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Net loss per  share – basic and diluted           |       | $                                | (0.06      | )                              | $          | (0.17 | ) | $ | (0.12 | ) | $ | (0.23 | ) |
|                                                   |       |                             |       |                           |       |   |   |   |   |
| Basic and diluted  weighted average shares outstanding |       | 6,225,825                        |       | 1,600,000                      |       | 6,635,636 |   | 1,600,000 |   |

 

Theaccompanying notes are an integral part of these unaudited financialstatements.

 

3

----

 

**PRB Gas Transportation, Inc.**

**Statement of Changes in Stockholders’ Equity**

**(Unaudited)**

 
| ** **                                          | ** ** | **Shares** | ** ** | **Amount**                    | ** ** |
|-----------------------------------------------------|------------|------------|------------|-------------------------------|------------|
| ** **                                          | ** ** | ** ** | ** ** | **(as Restated, see Note 2)** | ** ** |
| **Series A  10% Convertible Preferred stock**       |       |       |       |                          |       |
| Balance,  December 31, 2004                         |       | 2,400,000  |       | $                             | 2,400      |   |
| Conversion  to common stock                         |       | (2,400,000 | )          | (2,400                        | )          |
| Balance,  June 30, 2005                             |       | —     |       | —                        |       |
| ** **                                          | ** ** | ** ** | ** ** | ** **                    | ** ** |
| **Series B  5% Convertible Preferred stock**        | ** ** | ** ** | ** ** | ** **                    | ** ** |
| Balance,  December 31, 2004                         |       | 1,550,000  |       | 1,550                         |       |
| Conversion  to common stock                         |       | (1,550,000 | )          | (1,550                        | )          |
| Balance,  June 30, 2005                             |       | —     |       | —                        |       |
|                                                |       |       |       |                          |       |
| **Series C  Convertible Preferred stock**           | ** ** | ** ** | ** ** | ** **                    | ** ** |
| Balance,  December 31, 2004                         |       | 411,000    |       | 411                           |       |
| Activity for  the period                            |       | —     |       | —                        |       |
| Balance,  June 30, 2005                             |       | 411,000    |       | 411                           |       |
|                                                |       |       |       |                          |       |
| **Common  stock**                                   |       |       |       |                          |       |
| Balance,  December 31, 2004                         |       | 800,000    |       | 1,600                         |       |
| Issuance of  shares for initial public offering     |       | 2,300,000  |       | 2,300                         |       |
| Conversion  of Series A Convertible Preferred stock |       | 2,400,000  |       | 2,400                         |       |
| Conversion  of Series B Convertible Preferred stock |       | 1,550,000  |       | 1,550                         |       |
| Balance,  June 30, 2005                             |       | 7,050,000  |       | 7,850                         |       |
|                                                |       |       |       |                          |       |
| **Treasury  stock**                                 |       |       |       |                          |       |
| Balance,  December 31, 2004                         |       | 800,000    |       | (800,000                      | )          |
| Activity for  the period                            |       | —     |       | —                        |       |
| Balance,  June 30, 2005                             |       | 800,000    |       | (800,000                      | )          |
|                                                |       |       |       |                          |       |
| **Additional  paid-in-capital**                     |       |       |       |                          |       |
| Balance,  December 31, 2004                         |       |       |       | 10,763,372                    |       |
| Series A  Preferred stock dividends                 |       |       |       | (139,824                      | )          |
| Series B  Preferred stock dividends                 |       |       |       | (64,982                       | )          |
| Proceeds  from initial public offering              |       |       |       | 10,737,976                    |       |
| Balance,  June 30, 2005                             |       |       |       | 21,296,542                    |       |
|                                                |       |       |       |                          |       |
| **Accumulated  deficit** (as Restated, see Note 2)  |       |       |       |                          |       |
| Balance,  December 31, 2004                         |       |       |       | (650,538                      | )          |
| Net loss                                            |       |       |       | (605,190                      | )          |
| Balance,  June 30, 2005                             |       |       |       | (1,255,728                    | )          |
| **Total  stockholders’ equity**                |       |       |       | $                             | 19,249,075 |   |

 

Theaccompanying notes are an integral part of these unaudited financialstatements.

 

4

----

 

**PRB Gas Transportation, Inc.**

**Statements of Cash Flows**

**(Unaudited)**

 
| ** **                                                                   | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                   | ** ** | **2005**                      | ** ** | **2004** | ** ** |
| ** **                                                                   | ** ** | **(as Restated, see Note 2)** | ** ** | ** ** | ** ** |
| Cash flows  from operating activities                                        |       |                          |       |   |   |
| Net loss                                                                     |       | $                             | (605,190   | ) | $ | (114,643 | ) |
| Adjustments to reconcile net loss to net  cash used in operating activities: |       |                          |       |   |   |
| Depreciation and amortization                                                |       | 554,402                       |       | 165,333 |   |
| Accretion                                                                    |       | 2,592                         |       | 2,400 |   |
| Changes in assets and liabilities:                                           |       |                          |       |   |   |
| Accounts receivable, related party                                           |       | —                        |       | (62,465 | ) |
| Accounts receivable                                                          |       | (184,940                      | )          | (35,096 | ) |
| Accrued interest receivable                                                  |       | (32,640                       | )          | — |   |
| Prepaid expenses                                                             |       | (63,573                       | )          | (71,541 | ) |
| Deposits                                                                     |       | (20,864                       | )          | (126,586 | ) |
| Accounts payable                                                             |       | 61,872                        |       | 77,554 |   |
| Accrued expenses and other current  liabilities                              |       | 69,145                        |       | 4,279 |   |
| Net cash used in operating activities                                        |       | (219,196                      | )          | (160,765 | ) |
|                                                                         |       |                          |       |   |   |
| Cash flows  from investing activities                                        |       |                          |       |   |   |
| Purchases of property and equipment                                          |       | (84,996                       | )          | (8,398 | ) |
| Purchase of TOP system                                                       |       | —                        |       | (2,959,873 | ) |
| Deferred Bear Paw acquisition costs                                          |       | —                        |       | (60,892 | ) |
| Reduction in accrued TOP acquisition costs                                   |       | (184,713                      | )          | — |   |
| Net cash used in investing activities                                        |       | (269,709                      | )          | (3,029,163 | ) |
|                                                                         |       |                          |       |   |   |
| Cash flows  from financing activities                                        |       |                          |       |   |   |
| Proceeds from issuance of common stock                                       |       | —                        |       | 20,000 |   |
| Deferred costs of raising capital                                            |       | —                        |       | (46,603 | ) |
| Proceeds from issuance of Series A  Preferred stock, net of costs            |       | —                        |       | 4,987,025 |   |
| Proceeds from issuance of Series B  Preferred stock, net of costs            |       | —                        |       | 4,646,875 |   |
| Proceeds from IPO, net of costs                                              |       | 11,007,344                    |       | — |   |
| Borrowings under bank loan                                                   |       | 50,000                        |       | — |   |
| Repayment of bank loan                                                       |       | (1,550,000                    | )          | — |   |
| Dividends                                                                    |       | (338,489                      | )          | (62,500 | ) |
| Net cash provided by financing activities                                    |       | 9,168,855                     |       | 9,544,797 |   |
|                                                                         |       |                          |       |   |   |
| Net increase  in cash                                                        |       | 8,679,950                     |       | 6,354,869 |   |
|                                                                         |       |                          |       |   |   |
| Cash -  beginning of period                                                  |       | 320,150                       |       | — |   |
|                                                                         |       |                          |       |   |   |
| Cash -  end of period                                                        |       | $                             | 9,000,100  |   | $ | 6,354,869 |   |
|                                                                         |       |                          |       |   |   |
| Supplemental  disclosure of cash flow activity:                              |       |                          |       |   |   |
|                                                                         |       |                          |       |   |   |
| Cash paid for interest                                                       |       | $                             | 49,441     |   | $ | — |   |
|                                                                         |       |                          |       |   |   |
| Supplemental  schedule of non-cash financing activities:                     |       |                          |       |   |   |
|                                                                         |       |                          |       |   |   |
| Issuance of warrants in connection with  initial public offering             |       | $                             | 571,099    |   | $ | — |   |
|                                                                         |       |                          |       |   |   |
| Conversion of Series A and B preferred  stock                                |       | $                             | 3,950      |   | $ | — |   |
|                                                                         |       |                          |       |   |   |
| Asset retirement obligation                                                  |       | $                             | —     |   | $ | 60,004 |   |

 

Theaccompanying notes are an integral part of these unaudited financialstatements.

 

5

----

 

**PRB GAS TRANSPORTATION, INC.**

**Notes to Unaudited Financial Statements**

**June 30, 2005**

 

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

 

**Descriptionof Business**

 

PRB GasTransportation, Inc. (the “Company” or “PRB”) was incorporated in December 2003and was capitalized and commenced operations in January 2004 when the Companyacquired certain operating assets of TOP Gathering, LLC (“TOP”), which includeda gathering system and related land leases and gas gathering contracts.  Effective August 1, 2004, the Companyacquired certain operating assets of Bear Paw Energy, LLC (“BPE”) that arelocated in the same area of Wyoming as the TOP assets.  The BPE assets included two gatheringsystems, two delivery lines and related land leases and gas gathering andtransportation agreements.  The Companyowns and operates these three gas gathering systems and is in the business ofgathering and transporting natural gas. See Note 8 for the Company’s future business plans.

 

**Restatement**

 

During June2005 the Company determined that it had incorrectly invoiced a customer for theperiod August 2004 through April 2005. The Company invoiced the customer in June 2005 for the differencebetween the original invoices and the corrected invoices, approximately $304thousand.  The customer paid the Companythe difference due December 2005.  Forfurther information on this restatement see Note 2 – Restatement of Results.

 

**Basis ofPresentation**

 

Theaccompanying unaudited interim financial statements have been prepared by theCompany in accordance with accounting principles generally accepted in theUnited States of America for interim financial information and, pursuant to therules and regulations of the Securities and Exchange Commission, do not includeall the information and footnotes required by accounting principles generallyaccepted in the United States of America for complete financial statements. Inthe opinion of management, these interim financial statements contain alladjustments, consisting of only normal recurring adjustments, necessary topresent fairly the financial position of PRB as of June 30, 2005 and theresults of its operations and cash flows for the three months and six monthsended June 30, 2005 and 2004. These financial statements should be read inconjunction with the audited financial statements and the summary ofsignificant accounting policies and notes thereto included in the Company’sRegistration Statement on Form S-1 dated April 12, 2005.  The results of operations and cash flows forthe period are not necessarily indicative of the results of operations or cashflows that can be expected for the year ending December 31, 2005.

 

**Reclassifications**

 

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

 

**Significant Accounting Policies**

 

Cash and Cash Equivalents

 

Cash and cash equivalents consists of all highly liquid investments with original maturities of three months or less.

 

6

----

 

Concentrationsof Credit Risk

 

The Companyat times has cash in banks in excess of FDIC insurance limits and places itstemporary cash investments with high credit quality financial institutions.

 

The Companygrants credit in the normal course of business to customers in the UnitedStates. The Company periodically performs credit analysis and monitors thefinancial condition of its customers to reduce credit risk.  Management periodically reviews accountsreceivable and reduces the carrying amount by a valuation allowance thatreflects management’s best estimate of the amount that may not becollectible.  Allowances foruncollectible accounts receivable are based on information available andhistorical experience.  As of June 30,2005 and 2004, there was no allowance for uncollectible accounts receivable.

 

Revenuesfrom customers which represented 10% or more of the Company’s sales for thethree months and six months ended June 30, 2005 were as follows (as apercentage of sales):

 
| ** **   | ** ** | **For the three  months ended** | ** ** | **For the six  months ended** | ** ** |
|--------------|------------|---------------------------------|------------|-------------------------------|------------|
| **Customer** | ** ** | **June 30, 2005**               | ** ** | **June 30, 2005**             | ** ** |
| ** **   | ** ** | **(as  Restated, see Note 2)**  | ** ** |
| A            |       | 60                              | %          | 61                            | %          |
| B            |       | 11                              | %          | —                        |       |

 

Property,Equipment and Contracts

 

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

 

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

 

Long-LivedAssets

 

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

 

7

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AbandonmentLiability

 

The Company follows Statementof Financial Accounting Standards (“SFAS”) No. 143, *“Accountingfor Asset Retirement Obligations”.* The estimated fair value of the future costs associated withdismantlement, abandonment and restoration of facilities related to assetsacquired in the TOP acquisition was recorded as of January 1, 2004, theeffective date of the acquisition. The net estimated costs were discounted topresent values using a risk adjusted rate over the estimated economic life ofthe compressor site.  Such costs werecapitalized as part of the cost of the related asset and are amortized.  The associated liability is classified as along-term liability and is adjusted when circumstances change and for theaccretion of expense which is recorded as a component of depreciation andamortization.  The Company has not yetrecorded an asset retirement obligation in conjunction with the assets acquiredfrom BPE because sufficient information to make a reasonable estimate of thefair value of the liability is not available.

 

Use ofEstimates

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities, disclosures of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period.  Actualresults could differ from those estimates.

 

RevenueRecognition

 

The Companyrecognizes revenue at the time gas is delivered.

 

Stock BasedCompensation

 

As permitted under SFAS No. 123, *“Accounting for Stock-Based Compensation,”*as amended by SFAS No. 148, the Company accounts for its stock-basedcompensation for options issued to employees in accordance with the provisionsof Accounting Principles Board Opinion No. 25, *“Accounting for Stock Issued to Employees”*(“APB 25”). As such, the Company accounts for its employee stock-basedcompensation arrangements using the intrinsic value method under whichcompensation expense related to employee stock grants is recorded if the fairvalue of the underlying stock exceeds the exercise price on the grantdate.  Certain pro forma net loss andloss per share disclosures for employee stock option grants are reflected belowas if the fair value method as defined in SFAS No. 123 had been applied.Transactions in equity instruments with non-employees for goods or services areaccounted for using the fair value method. Had compensation cost for theoptions issued under the PRB Transportation, Inc. Equity Compensation Plan beendetermined based upon the fair value at the grant date for options granted,consistent with the provisions of SFAS No. 123, the Company’s net loss and netloss per share for the three months and six months ended June 30, 2005 and 2004would have been increased to the pro forma amounts indicated below:

 

8

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| ** **                                                                                               | ** ** | **Three  months ended June 30,** | ** ** | **Six  months ended June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                                               | ** ** | **2005**                         | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                               | ** ** | **(as  Restated, see Note 2)**   | ** ** | ** **                     | ** ** | **(as  Restated, see Note 2)** | ** ** | ** ** | ** ** |
| Net loss applicable to common stockholders:                                                              |       |                             |       |                           |       |   |   |   |   |
| As reported                                                                                              |       | $                                | (397,482   | )                              | $          | (279,919 | ) | $ | (809,996 | ) | $ | (373,102 | ) |
| Total stock-based employee compensation expense determined under fair  value based method for all awards |       | 300,917                          |       | 22,012                         |       | 323,951 |   | 22,012 |   |
| Pro forma net loss                                                                                       |       | $                                | (698,399   | )                              | $          | (301,931 | ) | $ | (1,133,947 | ) | $ | (395,114 | ) |
|                                                                                                     |       |                             |       |                           |       |   |   |   |   |
| Net loss per share, basic and diluted:                                                                   |       |                             |       |                           |       |   |   |   |   |
| As reported                                                                                              |       | $                                | (0.06      | )                              | $          | (0.17 | ) | $ | (0.12 | ) | $ | (0.23 | ) |
| Pro forma                                                                                                |       | $                                | (0.11      | )                              | $          | (0.19 | ) | $ | (0.17 | ) | $ | (0.25 | ) |

 

The following tablesummarizes activity for options during the six months ended June 30, 2005:

 
| ** **                                           | ** ** | **Number of  Shares** | ** ** | **Weighted Average  Exercise Price** | ** ** |
|------------------------------------------------------|------------|-----------------------|------------|--------------------------------------|------------|
| Balance,  December 31, 2004                          |       | 220,000               |       | $                                    | 5.50       |   |
| Granted  during the six months ended June 30, 2005   |       | 170,000               |       | $                                    | 7.58       |   |
| Exercised  during the six months ended June 30, 2005 |       | —                |       | —                               |       |
|                                                 |       |                  |       |                                 |       |
| Balance,  June 30, 2005                              |       | 390,000               |       | $                                    | 6.41       |   |
|                                                 |       |                  |       |                                 |       |
| Exercisable  at June 30, 2005                        |       | 181,250               |       | $                                    | 6.38       |   |

 

9

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The following tablesummarizes activity for options during the six months ended June 30, 2004:

 
| ** **                                           | ** ** | **Number of  Shares** | ** ** | **Weighted Average  Exercise Price** | ** ** |
|------------------------------------------------------|------------|-----------------------|------------|--------------------------------------|------------|
| Balance,  January 1, 2004                            |       | —                |       | $                                    | —     |   |
| Granted  during the six months ended June 30, 2004   |       | 195,000               |       | 5.50                                 |       |
| Exercised  during the six months ended June 30, 2004 |       | —                |       | —                               |       |
|                                                 |       |                  |       |                                 |       |
| Balance,  June 30, 2004                              |       | 195,000               |       | $                                    | 5.50       |   |
|                                                 |       |                  |       |                                 |       |
| Exercisable  at June 30, 2004                        |       | 70,000                |       | $                                    | 5.50       |   |

 

The weighted averageremaining contractual life for the options outstanding at June 30, 2005 is 8.1years.  The fair value of each optiongranted is estimated on the date of grant using the Black Scholes optionpricing model.  The weighted average fairvalue of options outstanding at June 30, 2005 is $1.89.  The weighted average fair value of optionsgranted and exercisable at June 30, 2005 is $1.57.

 

Net Loss Per Share

 

The Company accounts forearnings (loss) per share (“EPS”) in accordance with SFAS No. 128, “*Earnings per Share*.” Under SFAS No. 128, basic EPS is computed by dividing net lossattributable to common shareholders by the weighted average common shares outstandingwithout including any potentially dilutive securities.  Diluted EPS is computed by dividing the netloss for the period by the weighted average common shares outstanding plus,when their effect is dilutive, common stock equivalents.

 

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

 
| ** **                                       | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|--------------------------------------------------|------------|---------------------------------|------------|-------------------------------|------------|
| ** **                                       | ** ** | **2005**                        | ** ** | **2004**                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| Series A Convertible  Preferred                  |       | —                          |       | 2,400,000                     |       | — |   | 2,400,000 |   |
| Series B  Convertible Preferred                  |       | —                          |       | 1,550,000                     |       | — |   | 1,550,000 |   |
| Series C  Convertible Preferred                  |       | 411,000                         |       | —                        |       | 411,000 |   | — |   |
| Warrants  (See Note 7)                           |       | 245,000                         |       | 45,000                        |       | 245,000 |   | 45,000 |   |
| Options                                          |       | 390,000                         |       | 195,000                       |       | 390,000 |   | 195,000 |   |
| Total  potentially anti-dilutive shares excluded |       | 1,046,000                       |       | 4,190,000                     |       | 1,046,000 |   | 4,190,000 |   |

 

10

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RecentAccounting Pronouncements

 

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

 

In March 2005, the SEC issued StaffAccounting Bulletin (SAB) No. 107 which expressed the views of theSEC regarding the interaction between SFAS No. 123(R) and certain SECrules and regulations. SAB No. 107 provides guidance related to thevaluation of share-based payment arrangements for public companies, includingassumptions such as expected volatility and expected term. In April 2005,the SEC approved a rule that delayed the effective date of SFAS No. 123(R)for public companies. As a result, SFAS No. 123(R) will be effective forPRB on January 1, 2006.

 

**Note 2 –Restatement of Results**

 

The Company acquired a contracteffective August 2004.  During June 2005the Company determined that it had incorrectly invoiced this customer for theperiod August 2004 through April 2005. The original invoices for this period did not take into account that theagreement includes a minimum contract billing provision.  The Company invoiced the customer for thedifference between the original invoices and the corrected invoices in June2005.  As the Company was not able todetermine if the $304 thousand that was invoiced to the customer during June2005 was going to be paid or was collectible, the Company had not previouslyrecognized the $304 thousand as revenue. The customer paid the Company for thedifference due (approximately $304 thousand) during December 2005, includingapproximately $36 thousand and $142 thousand in respect to the three months andsix months ended June 30, 2005, respectively, and $162 thousand in respect tothe year ended December 31, 2004. Accordingly, the Company has restated its financial statements assummarized below.

 

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

 
| ** **                            | ** ** | **For the three months ending June 30, 2005** | ** ** | **For the six months ending June 30, 2005** | ** ** |
|---------------------------------------|------------|----------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                            | ** ** | **As reported**                                    | ** ** | **Adjustment**                                   | ** ** | **As restated** | ** ** | **As reported** | ** ** | **Adjustment** | ** ** | **As restated** | ** ** |
| Revenue                               |       | $                                                  | 678,550    |                                             | $          | 36,071 |   | $ | 714,621 |   | $ | 1,414,157 |   | $ | 141,521 |   | $ | 1,555,678 |   |
| Net loss                              |       | $                                                  | (411,092   | )                                                | $          | 36,071 |   | $ | (375,021 | ) | $ | (746,711 | ) | $ | 141,521 |   | $ | (605,190 | ) |
| Net loss attributable to common stock |       | $                                                  | (433,553   | )                                                | $          | 36,071 |   | $ | (397,482 | ) | $ | (951,517 | ) | $ | 141,521 |   | $ | (809,996 | ) |
| Net loss per share basic and diluted  |       | $                                                  | (0.07      | )                                                | $          | 0.01 |   | $ | (0.06 | ) | $ | (0.14 | ) | $ | 0.02 |   | $ | (0.12 | ) |

 

 

** **

 
| ** **           | ** ** | **For the period ending** | ** ** |
|----------------------|------------|---------------------------|------------|
| ** **           | ** ** | **June 30, 2005**    | ** ** | **Dewcember 31, 2004** | ** ** |
| ** **           | ** ** | **As reported**           | ** ** | **Adjustment** | ** ** | **As restated** | ** ** | **As reported** | ** ** | **Adjustment** | ** ** | **As restated** | ** ** |
| Accounts  receivable |       | $                         | 304,509    |   | $ | 303,971 |   | $ | 608,480 |   | $ | 261,090 |   | $ | 162,450 |   | $ | 423,540 |   |
| Accumulated  deficit |       | $                         | (1,559,699 | ) | $ | 303,971 |   | $ | (1,255,728 | ) | $ | (812,988 | ) | $ | 162,450 |   | $ | (650,538 | ) |

 

Other line items in thesestatements such as operating income, current assets, etc. have been restatedsimilarly. The aforementioned restatement adjustments do not affect total cashflows provided by operating activities, net cash used in investing activitiesand net cash  used in financingactivities, although certain components of cash flows provided by operatingactivities have been restated.

11

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

 

Property andequipment consists of the following at June 30, 2005 and December 31, 2004:

 
| ** **                      | ** ** | **Useful Lives** | ** ** | **June 30, 2005** | ** ** | **December 31, 2004** | ** ** |
|---------------------------------|------------|------------------|------------|-------------------|------------|-----------------------|------------|
| Compressor  sites               |       | 10 years         |       | $                 | 2,097,006  |                  | $          | 2,027,209 |   |
| Pipelines  and interconnect     |       | 10 years         |       | 6,563,598         |       | 6,563,598             |       |
| Computer  equipment             |       | 3 years          |       | 21,399            |       | 10,585                |       |
| Office furniture  and equipment |       | 7 years          |       | 34,748            |       | 30,363                |       |
|                            |       |             |       | 8,716,751         |       | 8,631,755             |       |
| Less  accumulated depreciation  |       |             |       | (934,921          | )          | (495,552              | )          |
|                            |       |             |       | $                 | 7,781,830  |                  | $          | 8,136,203 |   |

 

Depreciation expense related to these assetstotaled $220,728 and $57,376 for the three months ended June 30, 2005 and 2004,respectively, and $439,369 and $114,290 for the six months ended June 30, 2005and 2004, respectively.

 

Contracts valued at $2,300,651 are beingamortized over 10 years which is the estimated life of the contracts and/or thefields underlying the contracts. Amortization expense related to these contracts was $57,516 and $25,521for the three months ended June 30, 2005 and 2004, respectively, and $115,033and $51,043 for the six months ended June 30, 2005 and 2004, respectively.

 

**Note 4 -Asset Retirement Obligation**

 

Property andequipment includes platforms to hold the leased compressors at the Company’sTOP gas gathering facilities. The Company is legally required to dismantlethese compressor platforms at the end of their useful lives.  In accordance with SFAS No. 143, “*Accounting for Asset Retirement Obligations*,*”* the Company recognized the fair value of a liability foran asset retirement obligation (“ARO”) in the amount of $60,004.  The Company capitalized that cost as part ofthe carrying amount of the compressor site which is depreciated over theestimated life of the compressors’ use. The following table describes all changes to the Company’s assetretirement obligation liability during the three months and six months endedJune 30, 2005 and 2004:

 
| ** **                                        | ** ** | **For the three months  ended June 30,** | ** ** | **For the six months ended  June 30,** | ** ** |
|---------------------------------------------------|------------|------------------------------------------|------------|----------------------------------------|------------|
| ** **                                        | ** ** | **2005**                                 | ** ** | **2004**                               | ** ** | **2005** | ** ** | **2004** | ** ** |
| Asset  retirement obligation, beginning of period |       | $                                        | 66,100     |                                   | $          | 61,204 |   | $ | 64,804 |   | $ | — |   |
| Acquisition  of TOP assets                        |       | —                                   |       | —                                 |       | — |   | 60,004 |   |
| Accretion  expense                                |       | 1,296                                    |       | 1,200                                  |       | 2,592 |   | 2,400 |   |
|                                              |       |                                     |       |                                   |       |   |   |   |   |
| Asset  retirement obligation, end of period       |       | $                                        | 67,396     |                                   | $          | 62,404 |   | $ | 67,396 |   | $ | 62,404 |   |

 

12

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The Company has not yet recordedan asset retirement obligation relating to obligations under certain of thesurface use agreements purchased from BPE because a reasonable estimate of theuseful lives of the fair market value of the liability cannot currently bemade.  The Company will periodicallyreview available information and record an ARO in the period that a reasonableestimate of the fair market value of the liability can be made.

 

**Note 5 –Income Taxes**

 

The Company has not recorded a tax benefit forthe current period as the realization is not expected to be likely during theyear. The benefit is also not expected to be realizable as a deferred tax assetat year end as the Company anticipates recording a full valuation allowance forall deferred tax assets, except to the extent of offsetting reversals ofexpected deferred tax liabilities.

 

**Note 6 –Notes Payable**

 

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

 

On April 13, 2005, the Company drew down an additional$50,000 on the line of credit for a total outstanding balance of $1,550,000.

 

On April 15, 2005, the Company repaid the $1,550,000outstanding balance on the note and accrued interest of $3,703 in full.

 

**Note 7 –Commitments and Contingencies**

 

Shareholder Pledge of Certificate of Deposit

 

On December 14, 2004, a preferred shareholder (“Pledgor”)pledged a certificate of deposit in the amount of $1,000,000 as collateral forthe BOK line of credit, as discussed above. The Company paid the shareholder a monthly fee of 0.529% of thecollateral value for this pledge. On April 15, 2005, upon repayment of the lineof credit outstanding balance, the certificate of deposit was returned to thePledgor by the BOK.

 

Gas Gatheringand Transportation Contracts - *TOP*

 

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

 

The Company assumed a gas gathering contractthat was effective in October 2001 to gather and deliver gas for $0.89 perthousand cubic feet (“Mcf”) until such time as the Company has received a totalof 4.5 billion cubic feet (“BCF”) of gas from the shipper.  Thereafter, the transportation fee will bereduced $0.05 for every 5 BCF of gas received. The first threshold was reached in June 2004 and accordingly the ratewas reduced to $0.84 per Mcf effective July 1, 2004. The Company estimates thatthe next threshold will not be reached for at least 10 years. The contractremains in effect as long as the Company’s gathering facility remainsprofitable.  In the event the contract isunprofitable for the Company, the Company may terminate the contract with 30days written notice.  Revenue generatedunder this contract during the six months ended June 30, 2005 and 2004 wasapproximately $124,400 and $350,439, respectively.  The amounts earned under this contract wereclassified as related party revenue in 2004 as they were received from acompany whose majority shareholder was a shareholder of PRB until September 30,2004.

 

13

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The Company assumed a 10-year gas gatheringcontract that was effective in September 2002 to gather and deliver gas for anunrelated third party for $0.58 per Mcf until such time as the shipper hasdelivered 2 Bcf.  Thereafter thegathering fee will be reduced to $0.52. This threshold was reached in June 2005. After the initial term, either party may terminate the contract with 30days written notice.  Revenue generatedunder this contract during the six months ended June 30, 2005 and 2004 wasapproximately $116,600 and $242,024, respectively.

 

The Company assumed a 10-year gas gatheringcontract that was effective in November 2003 to gather and deliver gas for$0.55 per Mcf.   After the initial term,either party may terminate the contract with 30 days written notice.  The producer behind this contract iscurrently directing its gas to another gatherer.  Revenue generated under this contract duringthe six months ended June 30, 2005 and 2004 was approximately $4,500 and$149,329, respectively.  The amountsearned under this contract were classified as related party revenue in 2004 asthey were received from a company whose majority shareholder was a shareholderof PRB until September 30, 2004.

 

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

 

GasGathering and Transportation Contracts - *BPE*

 

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

 

The Companyassumed four gas gathering contracts that are solely volume-based.  All of the contracts are for the life ofproduction, currently estimated to be 10 years, with prices of $0.37 per Mcf,$0.43 per Mcf and $0.539 per Mcf (two contracts currently billedtogether).  Revenues generated underthese contracts during the six months ended June 30, 2005 were $14,653, $42,162and $161,380, respectively.

 

The Companyassumed a gas transportation contract which expired in September 2004 but continuesto be billed under the old contract rate of $0.04 per Mcf until the contract isrenegotiated.  Revenue generated underthis contract during the six months ended June 30, 2005 was $8,436.

 

The Companyassumed eight gas gathering contracts which have gathering rates that are basedon both volume and compression used on the system.  One of these contracts includes a monthlyminimum billing provision.  All contractsare for the life of production, currently estimated to be ten years.  Gathering fees for these eight contracts havetwo major components: 1) volume is measured from a central gathering point tothe applicable delivery points and customers are charged a rate of $0.12 perMcf; and 2) a compression fee is charged for each compressor through which theowner’s gas flows.  The owner is chargedbased on allocated volumes multiplied by the corresponding compressionrate.  As of June 30, 2005, there werefive screw compressors billed at $11,000 each and one recip compressor billedat $40,000.  One of the eight contractsis subject to an additional fee based on volume from the wellhead to thecentral gathering point at a rate of $0.12 per Mcf.  Revenue generated under these eight contractsduring the six months ended June 30, 2005 was $942,042.

 

Possible Rescission of Series C Convertible PreferredStock Sale

 

In December 2004, the Company received $1,233,000 from thesale of 411,000 shares of Series C Convertible Preferred stock.  The Company paid no cash or other commissionsor finders’ fees in connection with this offering. In the view of theSecurities and Exchange Commission, this placement might not have been eligiblefor an exemption from registration  under the Securities Act of 1933. In the absence of such an exemption, investors could bring suit againstthe Company to rescind their stock purchases, in which event the Company couldbe liable for rescission payments to these investors of up to $1,233,000,exclusive of interest and costs. In August 2005, the Company filed aregistration statement on Form S-1 to register the underlying shares of commonstock issuable upon conversion of the Series C Convertible Preferred Stock.

 

14

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Office Lease

 

In May 2005,the Company entered into a 63 month lease for 4,768 square feet of office spacebeginning on August 1, 2005.  The leasecalls for monthly payments of base rent beginning in month four of the leaseterm and, in years subsequent to the first year, a proportionate share ofincreases in operating expenses and real estate taxes over PRB’s proportionateshare of the first year’s real estate taxes and operating expenses.  If PRB defaults under the terms andconditions of the lease, the three month conditional rent abatement will befully due and payable. The base rent for the first nine months is based on anannual payment of $16 per square foot and increases $0.50 per year through theterm of the lease.

 

**Note 8 -Stockholders’ Equity**

 

Initial PublicOffering

 

On April 12, 2005, theCompany’s registration statement on Form S-1 was declared effective by theSecurities and Exchange Commission and the Company’s stock began trading on theAmerican Stock Exchange under the trading symbol **PRB**.  The Company sold 2,300,000 shares of commonstock, including 300,000 shares pursuant to the underwriter’s exercise of itsover-allotment option.  In conjunctionwith the offering, holders of Series A and Series B preferred stock convertedtheir shares into an equal number of registered common shares.  The Company recorded proceeds of $10,169,158,net of underwriter’s discounts, commissions and expenses, including warrantsvalued at $583,215, as of June 30, 2005.

 

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

 

Dividends

 

Both the Series A and Series B shares haddividend rights which state that dividends will accrue from the date of issueuntil paid, whether or not earned or declared. As all of the Series A and B preferred shareholders converted to commonshares in April 2005, final dividends were paid through the date of conversion.

 

**Note 9 –Subsequent Events**

 

In July 2005, PRB enteredinto a letter of intent, subject to a definitive agreement, to develop coal bedmethane properties in an area of mutual interest in Wyoming and Montana withEnterra Energy Trust (“Enterra”).  Underthe venture, the Company will have the right to earn up to a 50% workinginterest in certain properties of Enterra’s recently acquired subsidiary, RockyMountain Gas (“RMG”).

 

Under the terms of the proposed agreement, PRBmay expend up to $21.8 million by August 31, 2007 to acquire, drill and developcoal bed methane properties, including the RMG properties, in the area ofmutual interest.  For any RMG propertiesthe Company develops or any new properties jointly acquired within the area ofmutual interest, PRB and Enterra will each own a 50% working interest.  Upon the expenditure of the $21.8 million, PRBwill earn a 50% interest in all of the RMG properties as defined in theagreement.   PRB plans to operate theproperties in the area of mutual interest. By funding the drilling on this acreage, the Company will also have theopportunity to gather the production on all properties except those currentlydedicated to other gatherers. Cash on hand is sufficient to fund plannedexpenditures through the end of 2005. The Company is currently evaluating various sources of financing to fundfuture spending.

 

The Company is in the process of completing amanagement services agreement to operate currently producing properties ownedby RMG.  In contemplation of thisagreement, PRB hired nine former RMG or affiliate employees in Wyoming,effective August 1, 2005.

 

15

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

 

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

 

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

 

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

 

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

 

This reportcontains our restated unaudited financial statements for the period ending June30, 2005.  During June 2005 we determinedthat we had incorrectly invoiced a customer for the period August 2004 throughApril 2005. This customer was acquired as part of our Bear Paw Energy, LLC (“BPE”)acquisition as described below.  Theoriginal invoices in respect to this customer for this period did not take intoaccount that the agreement includes a minimum contract billing provision.  We invoiced this customer for the differencebetween the original invoices and the corrected invoices in June 2005.  The customer paid the difference due(approximately $304 thousand) during December 2005, including approximately $105thousand and $36 thousand in respect to the three months and six months endedJune 30, 2005, respectively. As we were not able to determine if the $304thousand that was invoiced to the customer during June 2005 was going to bepaid or was collectible, we had not previously recognized the $304 thousand asrevenue. For additional information see Note 2 — Restatement of Results in Item1 of this report.

 

**Overview**

 

Weown and operate natural gas gathering systems in the Powder River Basin ofWyoming.  We commenced operations inJanuary 2004 upon our acquisition of certain operating assets of TOP Gathering,LLC (“TOP”).  In August 2004 we acquiredcertain operating assets of Bear Paw Energy, LLC. (“BPE”) that are located inthe same area of Wyoming as the TOP assets. These assets include two gathering systems, two delivery lines andrelated land leases and gas gathering and transportation agreements.  We charge a fee for gathering, compressingand dehydrating natural gas.  Ourgathering systems collect gas at a producer’s wellhead or at a collection pointand deliver it to a transmission line owned by a third party.  To date we have not taken ownership of gasthat we gather.

 

Naturalgas wells in the Powder River Basin area typically experience sharp declines inproduction volume in the first several years of production.  Production then stabilizes and declines moreratably over a gas well’s average life of approximately eight to 10 years.  The majority of the wells serviced by our TOPand Bear Paw gathering systems have reached a stable decline phase ofproduction.  We believe that undevelopedreserves in the fields serviced by these systems may provide additionalproduction that could offset future declines and possibly exceed current gasproduction. In light of the steep volume declines that we have experienced atour TOP system, we are in the process of evaluating opportunities to reducesystem operating costs and to increase throughput. We expect that we willcomplete this evaluation during the third quarter of 2005.

 

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We plan to expand our presentoperations by:

 

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

•                  designing and building new gathering systems;

•                  acquiring existing gathering systems;

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

•                  operating producing properties for otherparties under a proposed management agreement; and

•                  developing and acquiring coal bed methaneproperties as outlined below.

 

InJuly 2005, we entered into a letter of intent, subject to a definitiveagreement, to develop coal bed methane properties in an area of mutual interestin Wyoming and Montana with Enterra Energy Trust (“Enterra”).  Under the venture, the Company will have theright to earn up to a 50% working interest in certain properties of Enterra’srecently acquired subsidiary, Rocky Mountain Gas (“RMG”).

 

Under the terms of theproposed agreement, we may expend up to $21.8 million by August 31, 2007 toacquire, drill and develop coal bed methane properties, including the RMGproperties, in the area of mutual interest. For any RMG properties we develop or any new properties we jointly acquirewithin the area of mutual interest, PRB and Enterra will each own a 50% workinginterest.  Upon the expenditure of the$21.8 million, we will earn a 50% interest in all of the RMG properties asdefined in the proposed agreement.   Weplan to operate the properties in the area of mutual interest.  By funding the drilling on this acreage, wewill also have the opportunity to gather the production on all propertiesexcept those currently dedicated to other gatherers. Our cash on hand issufficient to fund planned expenditures through the end of 2005.  We are currently evaluating various sourcesof financing, including equity and or debt offerings, in order to fund our planned2006 and 2007 development and acquisition activities.

 

We are in the process ofcompleting a management services agreement to operate currently producingproperties owned by RMG.  Incontemplation of this agreement, we have hired nine former RMG or affiliateemployees in Wyoming, effective August 1, 2005.

 

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

 

OnApril 12, 2005, we completed our initial public offering of 2,300,000 shares ofcommon stock (including the underwriter’s over-allotment option of 300,000shares) at $5.50 per share and commenced trading on the American Stock Exchangeunder the trading symbol ‘PRB.’  Wereceived proceeds of $11,273,100 net of underwriter’s discounts, commissionsand expenses at closing on April 15, 2005. Additional costs of the offering, including warrants valued at $583,215,totaled $1,103,942 at June 30, 2005.

 

Alsoin April 2005, all of our Series A and B preferred shareholders converted their3,950,000 shares of preferred stock into an equal number of shares of commonstock.  We filed a registration statementon Form S-1 to register the common shares underlying our Series C convertiblestock.

 

AtAugust 13, 2005, we have 7,055,894 shares of common stock outstanding.

 

**FinancialOperations Overview**

 

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

 

***Nature of revenue***The amount of revenue we generate willprimarily depend on the level of the fees we charge for gathering and theamount of throughput in our pipelines.  Oneof our contracts includes a monthly minimum billing provision. Gathering feesare determined by negotiation with the producers or shippers involved.  Our fees are not regulated by anygovernmental authority.  To date, we havenot taken ownership of the gas that we gather.

 

Asof June 30, 2005, we have 13 customers, one of which represents 10% or more ofour revenues for the six months ended June 30, 2005.   Someof our customers may be highly leveraged and subject to their own operating andregulatory risks.  If either of these keycustomers default on their obligations to us, our financial results would beadversely affected.

 

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Wehave two types of gathering contracts.  Sevenof our contracts are currently on a volume only basis where we charge a set feeper thousand cubic feet, or Mcf, of gas gathered. The rates for these contractsvary from approximately $0.37 per Mcf to $0.70 per Mcf, with those below $0.53per Mcf accounting for less than 3.3% of our revenues for the six months ended June30, 2005.  One of the producers coveredby this type of contract is currently directing its gas to another gatheringsystem.  The balance of our gatheringcontracts are a combination of a $0.12 per Mcf fee based on volume and anadditional fee for each compressor used on the system.  These compression fees are allocated to eachproducer on the system based on its individual usage volumes and the totalusage volumes of gas passing through the system.  In June 2005 the gathering fees under thistype of contract ranged from approximately $0.60 per Mcf to $0.71 per Mcf.  These fees will vary monthly depending on theproducers’ individual production and the system’s total throughput.  Amounts earned under two of these contractswere classified as related party revenue in 2004 as they were received from acompany whose majority shareholder was a shareholder of PRB until September 30,2004.

 

Twoof our contracts have thresholds which provide for a reduction in rates.  We assumed a gas gathering contract thatcommenced in October 2001 to gather and deliver gas for a related party for$0.89 per Mcf until such time as we received a total of 4.5 billion cubic feet,or Bcf, of gas from the shipper. Thereafter, the transportation fee will be reduced $0.05 for every 5 Bcfof gas received.  The first threshold wasreached in June 2004 and accordingly the rate was reduced to $0.84 per Mcfeffective July 1, 2004. We estimate that the next threshold will not be reachedfor at least 10 years. The contract remains in effect as long as our gatheringfacility remains profitable.  In theevent the contract is unprofitable for us, we may terminate the contract with30 days written notice.  Revenuesgenerated under this contract during the six months ended June 30, 2005 were $124,391.

 

Inaddition, we assumed a 10-year gas gathering contract commencing in September2002 to gather and deliver gas for an unrelated third party for $0.58 per Mcfuntil such time as the shipper has delivered two Bcf.  Thereafter, the gathering fee will be reducedto $0.52 per Mcf.  This threshold was reachedin June 2005.  After the initial term,either party may terminate the contract with 30 days written notice.  Revenues generated under this contract duringthe six months ended June 30, 2005 were $116,604.

 

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

 

***Operating expenses***Operating expenses include compression,operating agreement expense, site supervision costs, maintenance and operatingsupplies, property taxes, insurance, land use and surface rights payments andcontract services, all of which are relatively fixed costs. Operating expensesalso include transportation fees paid to others which vary with the throughputon our gathering lines.

 

***Depreciation and amortization expense****  *Depreciation and amortization expense relates principally to thedepreciation of the gathering systems and amortization of relatedcontracts.  These assets are depreciatedor amortized over estimated useful lives.

 

***General and administrative expense***General and administrative expense includescompensation expense, professional fees and corporate overhead. We expect that currentlyand in the near future these costs as a percentage of revenue will be higherthan desired due to our only recently commencing operations, but as revenueincreases we expect these costs to fall within industry ranges.

 

***Interest expense ***At March31, 2005, we had a note payable to the Bank of Oklahoma under a line of creditin the amount of**** **$1,500,000.  Interest was payable monthly at a fluctuatinginterest rate at the JPMorgan Chase Bank prime rate per annum.  The annual interest rate was 5.75% at March31, 2005. This bank line of credit matured the earlier of May 31, 2005 orwithin three days following the funding of the initial public offering and wassecured by all of our gathering assets and a pledge of a $1,000,000 certificateof deposit by a preferred stockholder. In consideration for this $1,000,000 pledge, we agreed to pay thepreferred stockholder a monthly fee of 0.529% until the bank line of credit wasretired and the pledge was released.  InApril 2005, we drew down an additional $50,000 on the line of credit.

 

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

 

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

 

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**CriticalAccounting Policies**

 

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

 

***Revenue recognition***

 

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

 

***Long-lived assets***

 

Wecalculate depreciation and amortization based on estimated useful lives andsalvage values of our assets. When assets are placed into service, we makeestimates with respect to their useful lives that we believe are reasonable.However, factors such as competition, regulation or environmental matters couldcause us to change our estimates, thus impacting the future calculation ofdepreciation and amortization. We evaluate long-lived assets for potentialimpairment by identifying whether indicators of impairment exist and, if so,assessing whether the long-lived assets are recoverable from estimated futureundiscounted cash flows. The actual amount of impairment loss, if any, to berecorded is equal to the amount by which a long-lived asset’s carrying value exceedsits fair value. Estimates of future undiscounted cash flows and fair value ofassets require subjective assumptions with regard to future operating resultsand actual results could differ from those estimates. We recorded noimpairments of long-lived assets during the six months ended June 30, 2005.

 

***Abandonment liability***

 

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

 

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***Stock-based compensation***

 

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

 

***Contingencies***

 

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

 

**Resultsof Operations**

 

***Six months ended June 30, 2005(unaudited) compared to the six months ended June 30, 2004 (unaudited)***

 

***Revenues******* Gas gathering revenues were $1,555,678 for thesix months ended June 30, 2005 compared with $741,792 for the six months ended June30, 2004, an increase of $813,886  or 110%.  Revenues from the Bear Paw systems of $1,310,494are included in the revenues for the six months ended June 30, 2005 and offsetthe decrease of $496,308, or 66.9%, experienced for the TOP system.  Of this decrease, approximately $149,000  was attributable to the redirection of one ofour producer’s gas to another gathering system and the rest was due to lowernatural gas volumes processed through the gathering system by existingproducers.

 

***Operating expenses*** Operating expenses totaled $874,994 for the sixmonths ended June 30, 2005 compared with $440,125 for the six months ended June30, 2004, an increase of $434,869, or 98.8%. Bear Paw operating expenses of $601,733are included in operating expenses for the six months ended June 30, 2005.  The decrease for this period excluding theBear Paw expenses is $166,864, or 37.9%. Approximately $88,700 of this decreaseis attributable to a reduction in the number of compressors leased and arenegotiation of compressor lease rates and approximately $93,000 is due to adecrease in gas transportation fees paid based on the lower gas volumes.  These decreases were offset by an increase inproperty tax of approximately $13,000. We reduced the number of compressorsutilized due to the lower natural gas volumes being produced.

 

***Depreciation and amortization*** Depreciation and amortization totaled $556,994for the six months ended June 30, 2005 compared with $167,733 for the sixmonths ended June 30, 2004, an increase of $389,261, or 232%.  Bear Paw depreciation and amortizationexpenses of $382,329 are included in depreciation and amortization expenses forthe six months ended June 30, 2005.  Theactual increase for this period excluding the Bear Paw expenses is approximately$7,000, which is attributable to depreciation on office furniture and equipmentand an additional meter at the TOP facility.

 

***General and administrative expenses***** **General andadministrative expenses totaled $727,799 for the six months ended June 30, 2005compared with $261,515 for the six months ended June 30, 2004, an increase of $466,284,or 178%. Approximately $242,000 of the increase is attributable to payroll andrelated employee expense due to the hiring of professional management and staffthat were necessary for operations.  Approximately$86,000 of the increase is attributable to professional and consulting fees,including $23,000 accrued for a property tax assessment appeal which resultedin a reduction of approximately $114,000 in annual property taxes.  There was also an increase in rent ofapproximately $13,000 and an increase in fees related to being a public companyof $82,411 which we did not have in 2004.

 

***Three months ended June 30, 2005(unaudited) compared to the three months ended June 30, 2004 (unaudited)***

 

***Revenues******* Gas gathering revenues were $714,621 for thethree months ended June 30, 2005 compared with $342,881 for the three monthsended June 30, 2004, an increase of $371,740 or 108%.  Revenues from the BearPaw systems of $602,108 are included in the revenues for the three months endedJune 30, 2005 and offset the decrease of $230,330, or 67.1%, experienced forthe TOP system.  Of this decrease,approximately $79,700 was attributable to the redirection of one of ourproducer’s gas to another gathering system and the rest was due to lowernatural gas volumes processed through the gathering system by existingproducers.

 

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***Operating expenses*** Operating expenses totaled $384,202 for the threemonths ended June 30, 2005 compared with $221,355 for the three months endedJune 30, 2004, an increase of $162,847, or 73.6%. Bear Paw operating expensesof $275,321 are included in operating expenses for the three months ended June30, 2005.  The decrease for this periodexcluding the Bear Paw expenses is $112,474, or 50.8%. Approximately $68,500 ofthis decrease is attributable to a reduction in the number of compressorsleased and a renegotiation of compressor lease rates and approximately $43,800is due to a decrease in gas transportation fees paid based on the lower gasvolumes.  We reduced the number ofcompressors utilized due to the lower natural gas volumes being produced.

 

***Depreciation and amortization*** Depreciation and amortization totaled $279,540for the three months ended June 30, 2005 compared with $84,097 for the three monthsended June 30, 2004, an increase of $195,443, or 232%.  Bear Paw depreciation and amortizationexpenses of $191,165 are included in depreciation and amortization expenses forthe six months ended June 30, 2005.  Theactual increase for this period excluding the Bear Paw expenses isapproximately $4,300, which is attributable to depreciation on office furnitureand equipment and an additional meter at the TOP facility.

 

***General and administrative expense***** **General and administrative expenses totaled $466,296 for the threemonths ended June 30, 2005 compared with $172,560 for the three months endedJune 30, 2004, an increase of $293,736, or 170%. Approximately $135,650 of theincrease is attributable to payroll and related employee expense due to thehiring of professional management and staff that were necessary foroperations.  Approximately $50,000 of theincrease is attributable to professional and consulting fees, including $23,000accrued for a property tax assessment appeal which resulted in a reduction ofapproximately $114,000 in annual property taxes.  There was also an increase in travel andentertainment of approximately $7,850 and an increase in fees related to beinga public company of approximately $74,000 which we did not have in 2004.

 

**General Trendsand Outlook**

 

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

 

***U.S. Gas Supply and Outlook*****We believe that the relatively high levels ofdemand for natural gas by both the residential and commercial markets willcontinue to result in steady or increasing natural gas prices which in turnwill drive drilling activity.  In 2003,the Bureau of Land Management forecasted that over 80,000 new wells will bedrilled in the Rocky Mountain region by end of 2008.  There are approximately 15,000 authorizeddrilling permits to be issued by the BLM in the State of Wyoming.  We believe that an increase in U.S. drillingactivity and additional sources of supply such as liquefied natural gas, orLNG, imports will be required for the natural gas industry to meet the expectedincreased demand for, and compensate for the slowing production of, natural gasin the United States.

 

***Rising Interest Rate Environment*** The credit markets recently have experienced50-year record lows in interest rates. As the overall economy strengthens, it is likely that monetary policywill tighten further, resulting in higher interest rates to counter possible inflation.  This could affect our ability to access thedebt capital markets to pay for acquisitions. In addition, interest rates on future credit facilities and debtofferings could be higher than current levels, causing our financing costs toincrease accordingly. Although this could limit our ability to raise funds inthe debt capital markets, we expect to remain competitive with respect toacquisitions and capital projects, as our competitors would face similarcircumstances.

 

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**Liquidityand Capital Resources**

 

***Cash flows and capital expenditures***

 

At June 30, 2005, cash andcash equivalents totaled $9,000,100 and we had working capital of $9,480,053.Since our inception, we have principally financed our operating cash flow needsthrough a public and private offerings of our equity securities.

 

OnApril 12, 2005, we completed our initial public offering of 2,300,000 shares ofcommon stock at $5.50 per share and our shares commenced trading on theAmerican Stock Exchange under the trading symbol ‘PRB.’  We received proceeds of $11,273,100 net ofunderwriter’s discounts, commissions and expenses at closing on April 15,2005.  Additional costs of the offering,including warrants valued at $583,215, totaled $1,103,942 at June 30, 2005.

 

We used a portion of theproceeds to retire the $1,550,000 balance outstanding under our $1,750,000 bankline of credit.  The bank line of creditwas cancelled upon payment in full and the security interest in our gatheringassets and the $1,000,000 certificate of deposit pledged by a preferredstockholder was released.

 

Our cash on hand issufficient to fund planned expenditures through the end of 2005.  We are currently evaluating various sourcesof financing to fund future development and acquisition activities.  While we currently have no definitive plansfor future issuances of equity securities other than in conjunction withcompensation plans, warrants and conversion of our preferred stock, we areplanning to issue equity and or debt securities, depending on their relativeeconomics and their availability, to finance our development and acquisition programs.

 

***Cash flow used in operations*** Cash used in operating activities was $219,196for the six months ended June 30, 2005. The net loss from operating activities of $605,190 was reduced by $554,402in depreciation and amortization, $2,592 in accretion expense and an increaseof $131,017 in accounts payable and accrued expenses and other current liabilities.This was offset by an increase of approximately $248,513 in accounts receivable,and prepaid expenses. $20,864 in deposits and $32,640 of accrued interestreceivable related to a certificate of deposit.

 

Cash used in operatingactivities was $160,765 for the six months ended June 30, 2004.  The net loss from operating activities of $114,643was reduced by $165,333 of depreciation and amortization and $2,400 ofaccretion expense and an increase of $81,833 in accounts payable and accruedexpenses and other current liabilities. This was offset by an increase of $71,541in prepaid expenses, $97,561 in accounts receivable and $126,586 in deposits.

 

***Cash flow used in investing activities***Cash used in investing activities was $269,709for the six months ended June 30, 2005. The funds were principally used for additions to the TOP system and forpurchasing office furniture and computer equipment.

 

Cash used in investingactivities was $3,029,163 for the six months ended June 30, 2004.  Approximately $2,960,000 was used for the acquisitionof the TOP system, $61,000 for the initial due diligence on the Bear Pawacquisition and the balance for the purchase of office equipment.

 

***Cash flow from financing activities*** Cash providedby financing activities was $9,168,855 for the six months ended June 30, 2005.  This includes cash proceeds of $11,007,344from our initial public offering.  We paidoff our line of credit in the amount of $1,500,000 and paid $338,489 inpreferred dividends.

 

Cash provided by financingactivities was $9,544,797 for the six months ended June 30, 2004.  We received $4,987,025 in net proceeds fromthe sale of our Series A preferred stock, $20,000 from the sale of common stockand net proceeds of $4,646,875 from the sale of our Series B preferredstock.  These amounts were reduced by thepayment of $62,500 of dividends on our Series A preferred stock and $46,603 ofcosts related to our initial public offering.

 

**PreferredStock Dividends**

 

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

 

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

 

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

 

***Credit risk***

 

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

 

***Market risk***

 

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

 

***Interest rate risk***

 

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

 

**Item 4.  Controls and Procedures**

 

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

 

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

 

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**PART II - OTHER INFORMATION**

 

**Item 1.        Legal Proceedings**

 

None.

 

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

** **

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

 

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

 

Actual expenses incurred in connection with the issuance anddistribution of the above securities during the period from the effective datethrough June 30, 2005 were $2,480,842,  representing underwriting discounts andcommissions of $1,012,000, underwriter expenses of $389,900 and other expensesof $1,078,942 (including warrants valued at $583,215).

 

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

 

Net proceeds from the offering were $10,169,158 after expenses andincluding the proceeds from the underwriter’s exercise of its over-allotment option.

 

In April 2005, $1,553,703 was used to repay the $1,550,000 outstandingon the line of credit from the Bank of Oklahoma plus accrued interest.

 

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

 

**Item 3.        Defaults Upon Senior Securities**

 

None.

 

**Item 4.       ****Submission****of Matters to a Vote of SecurityHolders**

 

None.

 

**Item 5.       ****Other****Information**

 

None.

 

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**Item 6.        Exhibits**

 
| **Exhibits** | ** ** | ** **                                                                   |
|--------------|------------|------------------------------------------------------------------------------|
| 3.1          |       | Amended Articles of  Incorporation of the Registrant *(1)*                   |
| 3.2          |       | Amended By-laws of the  Registrant*(2)*                                      |
| 3.3          |       | Series A Preferred  Stock Certificate of Designation *(1)*              |
| 3.4          |       | Series B Preferred  Stock Certificate of Designation*(1)*               |
| 3.5          |       | Series C Preferred Stock  Certificate of Designation*(2)*                    |
| 10.1         |       | Equity Compensation Plan *(1)*                                               |
| 31.1         |       | Rule  13a-14(a)/15d-14(a) Certification of Chief Executive Officer*(3)*      |
| 31.2         |       | Rule  13a-14(a)/15d-14(a) Certification of Principal Financial Officer *(3)* |
| 32.1         |       | Section  1350 Certification. of Chief Executive Officer *(3)*                |
| 32.2         |       | Section  1350 Certification of Principal Accounting Officer *(3)*            |

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*(1)*  Filedas an exhibit to form S-1 filed on November 1, 2004 and incorporated by referenceherein.

*(2)*  Filedas an exhibit to Form S-1/A filed on January 28, 2005 and incorporated byreference herein.

*(3)*  Filedherewith.

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, PRB GasTransportation, Inc. has duly caused this report to be signed on its behalf bythe undersigned thereunto duly authorized.

 

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

 

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| **Exhibits** | ** ** | ** **                                                                  |
|--------------|------------|-----------------------------------------------------------------------------|
| 3.1          |       | Amended Articles of  Incorporation of the Registrant*(1)*                   |
| 3.2          |       | By-laws of the Registrant*(2)*                                              |
| 3.3          |       | Series A Preferred  Stock Certificate of Designation *(1)*             |
| 3.4          |       | Series B Preferred  Stock Certificate of Designation*(1)*              |
| 3.5          |       | Series C Preferred  Stock Certificate of Designation *(2)*             |
| 10.1         |       | Equity Compensation Plan *(1)*                                              |
| 31.1         |       | Rule 13a-14(a)/15d-14(a)  Certification of Chief Executive Officer *(3)*    |
| 31.2         |       | Rule 13a-14(a)/15d-14(a)  Certification of Principal Financial Officer*(3)* |
| 32.1         |       | Section 1350 Certification.  of Chief Executive Officer *(3)*               |
| 32.2         |       | Section  1350 Certification. of Principal Accounting Officer *(3)*          |

 

----

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

 

* (2)*  Filedas an exhibit to Form S-1/A filed on January 28, 2005 and incorporated byreference herein.

 

 *(3)*  Filed herewith.

 

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