**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 20549**

**Form 10-Q**

**(MarkOne)**
| **x**                                            | ** ** | **QUARTERLY REPORT PURSUANT TO   SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|--------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|
| ** **                                       | ** ** | ** **                                                                                                                       |
| **For the quarterly period ended June 30, 2007** |
| ** **                                       |
| **Or**                                           |
| ** **                                       | ** ** | ** **                                                                                                                       |
| **o**                                            | ** ** | **TRANSITION REPORT PURSUANT TO   SECTION 13 OR 15(d) OF THE SECURITIES OF**                  |

 

**Forthe transition period from          to          **

**Commissionfile number 001-32471**

**PRBENERGY, INC.**

(Exact Name ofRegistrant as Specified in its Charter)

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

 

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

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.     Yes     x        No     o

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

Large accelerated filer  o  Accelerated filer  o   Non-acceleratedfiler   x

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

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

| **Class**                       |   | **Outstanding  as of August 10, 2007** |
|---------------------------------|--------|----------------------------------------|
| Common Stock,  $0.001 par value |   | 8,601,994 Shares                       |

 

 

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**TABLEOF CONTENTS**
| PART I — Financial  Information | 1                                                                                           |
|--------------------------------------|---------------------------------------------------------------------------------------------|
| Item 1.                         | Financial Statements                                                                        | 1 |
| Item 2.                         | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 12 |
| Item 3.                         | Quantitative  and Qualitative Disclosures About Market Risk                                 | 17 |
| Item 4.                         | Controls and  Procedures                                                                    | 17 |
| PART II — Other  Information    | 18                                                                                          |
| Item 1.                         | Legal  Proceedings                                                                          | 18 |
| Item  1A.                            | Risk  Factors                                                                               | 18 |
| Item 2                               | Unregistered  Sales of Equity Securities and Use of Proceeds                                | 18 |
| Item 3                               | Defaults Upon  Senior Securities                                                            | 18 |
| Item 4                               | Submission of  Matters to a Vote of Security Holders                                        | 18 |
| Item 5                               | Other  Information                                                                          | 19 |
| Item 6.                         | Exhibits                                                                                    | 20 |
|                                 | Signatures                                                                                  | 21 |
|                                      |                                                                                             |  |  |

 

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

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**PARTI — FINANCIAL INFORMATION**

**ITEM 1. FINANCIALSTATEMENTS**

**PRBENERGY, INC.**

**Consolidated Balance Sheets**

**(In thousands, except share amounts)**
| ** **                                                                                                            | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                            | ** ** | **2007**          | ** ** | **2006**              | ** ** |
| ** **                                                                                                            | ** ** | **(Unaudited)**   | ** ** | ** **            | ** ** |
| **Assets**                                                                                                            | ** ** | ** **        | ** ** | ** **            | ** ** |
| Current assets:                                                                                                       |       |              |       |                  |       |
| Cash and cash  equivalents                                                                                            |       | $                 | 2,905      |                  | $          | 11,157 |   |
| Restricted cash                                                                                                       |       | 2,157             |       | 2,078                 |       |
| Accounts  receivable, net                                                                                             |       | 2,871             |       | 2,527                 |       |
| Note receivable                                                                                                       |       | 2,250             |       |                  |       |
| Inventory                                                                                                             |       | 51                |       | —                |       |
| Prepaid expenses                                                                                                      |       | 535               |       | 789                   |       |
| **Total  current assets**                                                                                             | ** ** | **10,769**        | ** ** | **16,551**            | ** ** |
| Oil and gas properties  accounted for under the successful efforts method of accounting:                              |       |              |       |                  |       |
| Proved  properties                                                                                                    |       | 5,489             |       | 5,436                 |       |
| Unproved  leaseholds                                                                                                  |       | 9,729             |       | 9,282                 |       |
| Wells-in-progress                                                                                                     |       | 5,020             |       | 5,794                 |       |
| Total oil and  gas properties                                                                                         |       | 20,238            |       | 20,512                |       |
| Less:  accumulated depreciation, depletion and amortization                                                           |       | (1,245            | )          | (766                  | )          |
| **Net oil  and gas properties**                                                                                       | ** ** | **18,993**        | ** ** | **19,746**            | ** ** |
| Gathering and other  property and equipment                                                                           |       | 15,325            |       | 11,603                |       |
| Less:  accumulated depreciation and amortization                                                                      |       | (2,911            | )          | (1,919                | )          |
| **Net  gathering and other property and equipment**                                                                   | ** ** | **12,414**        | ** ** | **9,684**             | ** ** |
| Other non-current  assets:                                                                                            |       |              |       |                  |       |
| Deferred debt  issuance costs                                                                                         |       | 2,107             |       | 2,086                 |       |
| Less:  accumulated amortization                                                                                       |       | (771              | )          | (375                  | )          |
| Net deferred  debt issuance costs                                                                                     |       | 1,336             |       | 1,711                 |       |
| Other  non-current assets                                                                                             |       | 2,499             |       | 2,151                 |       |
| **Total  other non-current assets**                                                                                   | ** ** | **3,835**         | ** ** | **3,862**             | ** ** |
| **Total Assets**                                                                                                      | ** ** | **$**             | **46,011** | ** **            | **$**      | **49,843** | ** ** |
| ** **                                                                                                            | ** ** | ** **        | ** ** | ** **            | ** ** |
| **Liabilities  and Stockholders’ Equity**                                                                        | ** ** | ** **        | ** ** | ** **            | ** ** |
| Current liabilities:                                                                                                  |       |              |       |                  |       |
| Accounts payable                                                                                                      |       | $                 | 1,408      |                  | $          | 1,854 |   |
| Accrued expenses  and other current liabilities                                                                       |       | 650               |       | 979                   |       |
| Deferred gain                                                                                                         |       | 883               |       | —                |       |
| Current portion  of debentures                                                                                        |       | 1,125             |       | —                |       |
| **Total  current liabilities**                                                                                        | ** ** | **4,066**         | ** ** | **2,833**             | ** ** |
| Secured notes,  debentures and other debt, less current portion                                                       |       | 35,841            |       | 36,972                |       |
| Discount on debentures,  net of amortization                                                                          |       | (3,287            | )          | (4,326                | )          |
| Capital lease, less  current portion                                                                                  |       | 2,974             |       | —                |       |
| Other non-current  liabilities                                                                                        |       | 3,135             |       | 3,140                 |       |
| **Total  liabilities**                                                                                                | ** ** | **42,729**        | ** ** | **38,619**            | ** ** |
| Commitments and  Contingencies                                                                                        |       |              |       |                  |       |
| Stockholders’ equity:                                                                                            |       |              |       |                  |       |
| Common stock,  40,000,000 shares authorized; 8,601,994 and 8,231,894 issued, respectively,  and 8,601,994 outstanding |       | 10                |       | 10                    |       |
| Treasury stock                                                                                                        |       | (1,257            | )          | (1,257                | )          |
| Additional  paid-in-capital                                                                                           |       | 26,823            |       | 26,406                |       |
| Accumulated  deficit                                                                                                  |       | (22,294           | )          | (13,935               | )          |
| **Total  stockholders’ equity**                                                                                  | ** ** | **3,282**         | ** ** | **11,224**            | ** ** |
| **Total Liabilities and Stockholders’ Equity**                                                                   | ** ** | **$**             | **46,011** | ** **            | **$**      | **49,843** | ** ** |

 

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

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**PRBENERGY, INC.**

**Consolidated Statements of Operations**

**(In thousands, except share amounts)**

**(Unaudited)**
| ** **                                             | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                             | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                             | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                             | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues:                                              |       |                             |       |                           |       |   |   |   |   |
| Natural gas sales                                      |       | $                                | 346        |                           | $          | 48 |   | $ | 759 |   | $ | 106 |   |
| Gas gathering and processing                           |       | 364                              |       | 603                            |       | 872 |   | 1278 |   |
| Other                                                  |       | 10                               |       | 52                             |       | 14 |   | 146 |   |
| Total revenues                                         |       | 720                              |       | 703                            |       | 1,645 |   | 1,530 |   |
| Natural gas gathering expense                          |       | (47                              | )          | (15                            | )          | (103 | ) | (27 | ) |
| Natural gas production taxes                           |       | (37                              | )          | (5                             | )          | (77 | ) | (12 | ) |
| **Net revenues**                                       | ** ** | **636**                          | ** ** | **683**                        | ** ** | **1,465** | ** ** | **1491** | ** ** |
| Operating  expenses:                                   |       |                             |       |                           |       |   |   |   |   |
| Natural gas lease operating                            |       | 612                              |       | —                         |       | 1,273 |   | — |   |
| Gas gathering and processing                           |       | 593                              |       | 648                            |       | 1,026 |   | 1217 |   |
| Depreciation, depletion, amortization and accretion    |       | 951                              |       | 336                            |       | 1,806 |   | 656 |   |
| General and administrative                             |       | 1,194                            |       | 1,129                          |       | 2,794 |   | 2,146 |   |
| Other expense                                          |       | —                           |       | 48                             |       | — |   | 223 |   |
| **Total operating expenses**                           | ** ** | **3,350**                        | ** ** | **2,161**                      | ** ** | **6,899** | ** ** | **4,242** | ** ** |
| **Operating loss**                                     | ** ** | **(2,714**                       | **)**      | **(1,478**                     | **)**      | **(5,434** | **)** | **(2,751** | **)** |
| Other income  (expense):                               |       |                             |       |                           |       |   |   |   |   |
| Interest and other income                              |       | 582                              |       | 284                            |       | 853 |   | 471 |   |
| Gain on RMG settlement and sale of assets, net         |       | 240                              |       | —                         |       | 240 |   | — |   |
| Interest and other expense:                            |       |                             |       |                           |       |   |   |   |   |
| Convertible notes and debentures                       |       | (1,041                           | )          | (523                           | )          | (2,071 | ) | (869 | ) |
| Debt issuance costs and discount on debentures         |       | (804                             | )          | (101                           | )          | (1,550 | ) | (163 | ) |
| Other                                                  |       | (191                             | )          | —                         |       | (396 | ) | — |   |
| **Total other expense**                                | ** ** | **(1,214**                       | **)**      | **(340**                       | **)**      | **(2,924** | **)** | **(561** | **)** |
| **Net loss**                                           | ** ** | **$**                            | **(3,928** | **)**                          | **$**      | **(1,818** | **)** | **$** | **(8,358** | **)** | **$** | **(3,312** | **)** |
|                                                   |       |                             | ** ** | ** **                     |       |   |   |   |   |
| **Net loss per share — basic and diluted**        | ** ** | **$**                            | **(0.46**  | **)**                          | **$**      | **(0.24** | **)** | **$** | **(0.97** | **)** | **$** | **(0.44** | **)** |
|                                                   |       |                             |       |                           |       |   | ** ** | ** ** | ** ** |
| Basic and diluted  weighted average shares outstanding | ** ** | **8,601,994**                    | ** ** | **7,471,235**                  | ** ** | **8,601,994** | ** ** | **7,450,679** | ** ** |

 

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

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**PRBENERGY, INC.**

**Consolidated Statements of Cash Flows**

**(In thousands)**

**(Unaudited)**
| ** **                                                                                 | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                 | ** ** | **June 30,**              | ** ** |
| ** **                                                                                 | ** ** | **2007**                       | ** ** | **2006** | ** ** |
| **Cash  flows from operating activities:**                                                 |       |                           |       |   |   |
| Net loss                                                                                   |       | $                              | (8,358     | ) | $ | (3,312 | ) |
| Adjustments to reconcile net loss to net cash (used  in) provided by operating activities: |       |                           |       |   |   |
| Depreciation, depletion, amortization and accretion                                        |       | 1,806                          |       | 656 |   |
| Exploration expense                                                                        |       | —                         |       | 50 |   |
| Amortization of debt issuance costs                                                        |       | 510                            |       | 164 |   |
| Amortization of discount on debentures                                                     |       | 1,039                          |       | — |   |
| Non share based warrants issued for services  rendered                                     |       | —                         |       | 71 |   |
| Gain on RMG settlement                                                                     |       | (384                           | )          | — |   |
| Loss on sale of assets                                                                     |       | 104                            |       |   |   |
| Bad debt expense                                                                           |       | 317                            |       | — |   |
| Share-based compensation expense                                                           |       | 417                            |       | 392 |   |
| Capitalized interest                                                                       |       | (159                           | )          | (32 | ) |
| Changes in assets and liabilities:                                                         |       |                           |       |   |   |
| Accounts receivable                                                                        |       | (873                           | )          | (366 | ) |
| Inventory                                                                                  |       | (5                             | )          | 417 |   |
| Prepaid expenses                                                                           |       | 254                            |       | (472 | ) |
| Other non-current assets                                                                   |       | (427                           | )          | 11 |   |
| Accounts payable                                                                           |       | (461                           | )          | (1,057 | ) |
| Accrued expenses and other current liabilities                                             |       | (246                           | )          | 757 |   |
| Deferred revenue                                                                           |       | 46                             |       | — |   |
| Other non-current liabilities                                                              |       | —                         |       | 6 |   |
| Net cash used in operating activities                                                      |       | (6,421                         | )          | (2,715 | ) |
| **Cash  flows from investing activities:**                                                 |       |                           |       |   |   |
| Capital expenditures                                                                       |       | (2,690                         | )          | (6,204 | ) |
| Restricted cash related to future liablities of  acquired properties                       |       | —                         |       | (3,000 | ) |
| Sale of fixed assets                                                                       |       | —                         |       | 20 |   |
| Deferred acquisition costs                                                                 |       | —                         |       | (18 | ) |
| Unproved leasehold acquisitions                                                            |       | —                         |       | (183 | ) |
| Net cash used in investing activities                                                      |       | (2,690                         | )          | (9,385 | ) |
| **Cash  flows from financing activities:**                                                 |       |                           |       |   |   |
| Proceeds from convertible notes                                                            |       | —                         |       | 21,965 |   |
| Proceeds from RMG settlement                                                               |       | 1,000                          |       | — |   |
| Issuance costs related to debentures and convertible  notes                                |       | (135                           | )          | (1,051 | ) |
| Convertible preferred stock dividends                                                      |       | —                         |       | (5 | ) |
| Repayment of term loan                                                                     |       | (6                             | )          | — |   |
| Net cash provided by financing activities                                                  |       | 859                            |       | 20,909 |   |
| Net (decrease)  increase in cash                                                           |       | (8,252                         | )          | 8,809 |   |
| Cash—beginning  of period                                                             |       | 11,157                         |       | 6,434 |   |
| **Cash—end  of period**                                                               |       | $                              | 2,905      |   | $ | 15,243 |   |
|                                                                                       |       |                           |       |   |   |
| Supplemental  disclosure of cash flow activity:                                            |       |                           |       |   |   |
| Cash paid for interest                                                                     |       | $                              | 2,626      |   | $ | 808 |   |
| Supplemental  schedule for non-cash activity:                                              |       |                           |       |   |   |
| Issuance of warrants in connection with convertible  notes                                 |       | $                              | —     |   | $ | 92 |   |
| Capital remediation costs                                                                  |       | $                              | 46         |   | $ | 1,500 |   |
| Asset retirement obligations                                                               |       | $                              | 171        |   | $ | 2,085 |   |
| Capital lease                                                                              |       | $                              | 3,050      |   | $ | — |   |
| Deferred gain on  RMG settlement                                                           |       | $                              | 883        |   | $ | — |   |

 

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

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**PRBENERGY, INC.**

**Notes toConsolidated Financial Statements**

**June 30,2007**

**(Unaudited)**

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

***Description of Business***

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

***Basis of Presentation***

We have preparedthis Quarterly Report on Form 10-Q under the rules and regulations of theUnited States Securities and Exchange Commission.  Because this is an interim period filingwhich is being presented, using a condensed format, certain information andfootnote disclosures normally included in consolidated financial statementsprepared in accordance with accounting principles generally accepted in theUnited States of America have been condensed or omitted.  These interim financial statements should beread in conjunction with the audited consolidated financial statements and thesummary of significant accounting policies and notes thereto included in our2006 Annual Report on Form 10-K.  During interim periods, we followthe same accounting policies outlined in our 2006 Annual Report on Form 10-K,Note 2 — Summary of Significant Accounting Policies.  The consolidated financial statements as ofJune 30, 2007, and for the three and six months ended, June 30, 2007 and 2006,are unaudited.  Certain reclassificationshave been made to the 2006 unaudited condensed consolidated financialstatements to conform to the 2007 presentation. Such reclassifications had no effect on the 2006 net loss.  In the opinion of management, these interimfinancial statements contain all adjustments which are of a normal, recurringnature to fairly present the financial position of PRB as of June 30, 2007 andthe results of our operations for the three and six months ending June 30, 2007and 2006, and cash flows for the six months ended June 30, 2007 and 2006.  Information for interim periods may not beindicative of our results of operations for the entire year.

***Summary of Significant Accounting Policies***

*Use ofEstimates*

Management makesestimates and assumptions that affect the amounts reported in the financialstatements and the disclosures made in the accompanying notes.  Some examples of such estimates are theallowance for accounts receivable, the appropriate levels of various accrualsincluding asset retirement obligations, determining the remaining economiclives and carrying values of property and equipment, and the estimates of gasreserves that effect the depletion calculations and impairments for gasproperties and other long-lived assets. In addition, we use assumptions to estimate the fair value ofshare-based compensation.  We believe ourestimates and assumptions are reasonable; however, actual results may differfrom our estimates.

*Share-BasedCompensation*

Effective January1, 2006, we adopted Statement of Financial Accounting Standards (“SFAS”) No.123(R), “*Share-Based Payment,”* using the modifiedprospective transition method and, as a result, did not retroactively adjustresults from prior periods.  SFAS No. 123(R) requires that share-basedcompensation expense be measured using estimates of the fair value of allshare-based awards and applies to new awards and to awards 

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modified, repurchased orcancelled after December 31, 2005, as well as to the unvested portion of awardsoutstanding as of January 1, 2006.  Underthe modified prospective transition method, we are recognizing share-basedcompensation expense over the remaining vesting period for awards that wereoutstanding but unvested at January 1, 2006 and we are recognizing share-basedcompensation expense for the fair value of all awards granted on or afterJanuary 1, 2006 as the awards vest.  Weapply the Black-Scholes option valuation model in determining the fair value ofshare-based payments to employees.  See Note 7 - EquityIncentive Plan for further discussion of share-based compensation.

*NetLoss Per Share*

We account forearnings (loss) per share (“EPS”) in accordance with SFAS No. 128, “*Earnings per Share.*”  Under SFAS No. 128, basic EPS is computed bydividing the net loss applicable to common stockholders by the weighted averagecommon shares outstanding without including any potentially dilutivesecurities.  Diluted EPS is computed bydividing the net loss applicable to common stockholders for the period by theweighted average common shares outstanding plus, when their effect is dilutive,common stock equivalents.  The followingare potentially dilutive shares that are excluded from the calculation as theyare anti-dilutive:
| ** **                                  | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                  | ** ** | **2007**                                      | ** ** | **2006** | ** ** |
| ** **                                  | ** ** | **(equivalent shares)**                  | ** ** |
| Warrants                                    |       | 365,000                                       |       | 300,000 |   |
| Options                                     |       | 719,750                                       |       | 659,250 |   |
| Convertible  notes                          |       | 3,137,857                                     |       | 3,137,857 |   |
| Total potentially  dilutive shares excluded |       | 4,222,607                                     |       | 4,097,107 |   |

 

*Concentrationsof Credit Risk*

We grant credit inthe normal course of business to customers in the United States.  Management periodically performs a credit analysisand monitors the financial condition of our customers to reduce creditrisk.  Management periodically reviews accounts receivable and reduces thecarrying amount by a valuation allowance that reflects management’s bestestimate of the amount that may not be collectible.  Allowances foruncollectible accounts receivable are based on information available andhistorical experience.  As of June 30, 2007 and December 31, 2006, therewere balances of $28,000 and $604,000, respectively, as an allowance foruncollectible accounts receivable.  Thesignificant reduction in the balance of the allowance from December 31, 2006was due to the Rocky Mountain Gas, Inc. (“RMG”) settlement payment.  (See below for the Rocky Mountain Gas Inc.Settlement.)

Revenues fromcustomers which represented 10% or more of our gas sales or gathering fees forthe three and six months ended June 30, 2007 and 2006 were as follows:
| ** **                           | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| **Customer**                         | ** ** | **2007**                                            | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                           | ** ** | **(% of total revenue)**             | ** ** | **(% of total revenue)**           | ** ** |
| A — Exploration  and Production |       | 49                                                  | %          | —                                            |       | 43 | % | — |   |
| B — Gathering  and Processing   |       | —                                              |       | 31                                                | %          | — |   | 37 | % |
| C — Gathering  and Processing   |       | 43                                                  | %          | 17                                                | %          | 41 | % | 15 | % |
| D — Gathering and  Processing   |       | —                                              |       | 12                                                | %          | — |   | — |   |

 

*DebtIssuance Costs and Discount on Debt*

 We includedebt issuance costs in other non-current assets.  These costs areassociated with the senior subordinated convertible notes (“Notes”) we issuedin March 2006 and the senior secured debentures (“Debentures”) we issued inDecember 2006.  The remaining unamortized debt issuance cost was$1,336,000 at June 30, 2007 and is being amortized using the effective interestrate method over the term of the debt.

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The discount onthe Debentures of $4,326,000 is reflected as a liability on the balance sheetat December 31, 2006.  The remainingunamortized discount at June 30, 2007 was $3,287,000 and is being amortizedusing the effective interest rate method over the term of the debt.

*RockyMountain Gas Inc. Settlement*

On May 15, 2007,RMG and PRB reached a settlement and terminated their arbitration proceedings.RMG agreed to pay PRB $3,250,000 total, represented by two cash paymentsof $500,000 each made on May 22nd and June 21st, 2007, with the balance due on or beforeOctober 31, 2007.  A promissory notedated June 1, 2007 (the “RMG Note”) for the remaining balance was also receivedfrom RMG.  The Note bears an interestrate of 10% per annum and is secured by a mortgage.  **The interest applicable for financing the RMG Note totaled$150,000, which is payable at maturity of the RMG Note.  This amount will be recognized as interestincome over the term of the RMG Note. **TheRMG Note balance at June 30, 2007 is $2,250,000 and is reflected as a NotesReceivable on the balance sheet.

In addition as ofJune 1, 2007, RMG assigned to PRB all of RMG’s interests, includinginfrastructure, in the Moyer coal-bed methane wells located in Section 19,T48N, R71W, adjacent to PRB’s acreage. In turn, PRB assigned to RMG all of PRB’s interests (other than Section 19)in the acreage and wells (“PRB Assets”) originally included in the farmoutagreement with RMG.

**Thenet costs for the properties transferred to RMG that were previously incurredby PRB and were related to the RMG agreement were compared to the value of theproperties received from RMG.  The netresult was compared with the total cash proceeds to be received of $3,250,000,plus interest on the RMG Note of $150,000 and produced a**total gain of $1,267,000 for the transaction. As cash is received, a proportion of the total gain less the interestincome component will be recognized as the current period’s gain from the saleof these assets.  The deferred gain willbe recognized as income upon receipt of the final payment on the RMG Note onOctober 31, 2007.  At June 30, 2007, thedeferred gain balance was $883,000.  Thisis computed as follows:
| Total computed amount of  gain                |   | $       | 1,267,000 |   |
|-----------------------------------------------|--------|---------|-----------|--------|
| Less: gain  recognized in the current quarter |   | 343,000 |      |
| Less: interest  income in the current quarter |   | 41,000  |      |
| Deferred gain balance                         |   | $       | 883,000   |   |

 

**Note 2—Recent Accounting Developments**

In June 2006, theFinancial Accounting Standards Board (“FASB”) issued Interpretation (“FIN”) No.48, “*Accounting for Uncertainty in IncomeTaxes”—*an interpretation ofFASB Statement No. 109,*“Accounting forIncome Taxes*.”  FIN No.48 requires that realization of an uncertain income tax position must be “morelikely than not” (i.e. greater than 50% likelihood of receiving a benefit)before it can be recognized in the financial statements.  Further, this interpretation prescribes thebenefit to be recorded in the financial statements as the amount most likely tobe realized assuming a review by tax authorities having all relevant informationand applying current conventions.  FINNo. 48 also clarifies the financial statement classification of tax-relatedpenalties and interest and sets forth new disclosures regarding unrecognizedtax benefits.  FIN No. 48 is effectivefor fiscal years beginning after December 15, 2006, and we adopted thisinterpretation effective January 1, 2007. See Note 6 – Income Taxes for further discussion.

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

In February 2007,the FASB issued SFAS No. 159, “**The Fair Value Option for Financial Assets and FinancialLiabilities,”** which permits an entity to measure certainfinancial assets and financial liabilities at fair value.  The objective of SFAS No. 159 is to improvefinancial reporting by allowing entities to mitigate volatility in reportedearnings caused by the measurement of related assets and liabilities usingdifferent attributes, without having to apply complex hedge accountingprovisions.  Under SFAS No. 159, entitiesthat elect the fair value option (by instrument) will report unrealized gainsand losses in earnings at each subsequent reporting date.  The fair value option election isirrevocable, unless a new election date occurs. SFAS No. 159 

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establishes presentationand disclosure requirements to help financial statement users understand theeffect of the entity’s election on its earnings, but does not eliminatedisclosure requirements of other accounting standards.  Assets and liabilities that are measured atfair value must be displayed on the face of the balance sheet.  This Statement is effective beginning January1, 2008, and we will assess the potential impact of this Statement on ourfinancial statements prior to that date.

**Note 3—Significant Agreements**

*CompressorLease Agreement*

On February 12,2007, PRB Gathering, Inc. entered into a 5-year lease agreement with J-W PowerCompany (“J-W”), effective January 24, 2007.  Under the terms of theagreement, J-W will supply us with gas compression equipment and relatedservices.  The compression equipment will service our gas gatheringpipelines in the Powder River Basin.

The lease meetsthe criteria under SFAS No. 13, “*Accounting for Leases*,”for classification as a capital lease on the balance sheet.  As a result,a capital lease asset of $3,050,000, which represents the estimated fair valueof the property, was recorded in January 2007. The related liability, less the current portion of $105,000, is shown asa non-current liability of $2,974,000 on the balance sheet at June 30,2007.  In addition, a cash payment of $650,000 was made to J-W forfuture maintenance repairs in connection with the lease.  The capital lease and prepayment will be amortizedas expenses over the term of the lease.  Monthly lease payments rangingfrom $100,000 to $150,000 will reduce the liability and also will includeinterest and executory (sales tax and environmental fees) expenses.

*RMG Settlement Agreement - Consent of Holders ofthe Debentures*

On June 15, 2007,as a condition for obtaining the consent of the lenders, who held a securityinterest in the PRB Assets to be transferred to RMG, we agreed to pay thelenders, as a reduction of our outstanding balance due on the Debentures,one-half of the final $2,250,000 payment to be received from RMG.  Under our agreement with the lenders, uponreceipt of the RMG payment we will pay the lenders $1,125,000, plus anyassociated interest and fees due under the provisions of the Debentures.  The payment to the lenders will partiallyredeem, on a pro rata basis, a portion of the principal and interest amountsdue under the Debentures.

**Note 4—Asset Retirement Obligations**

We recognize anestimated liability for future costs associated with abandoning our propertyand equipment used in the production of natural gas from our wells and in ourgas gathering operations.  A liabilityfor the fair value of an asset retirement obligation is established when thelong-lived asset is acquired, constructed and or completed, with a correspondingincrease in the carrying value of the asset. We depreciate the asset retirement obligations associated with ourproperty and equipment, and deplete the amounts recorded in respect to our gasproperties and recognize accretion expense of the liability, all based on theestimated useful lives of the assets and remaining recoverable reserves.

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

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**Note5—Borrowings**

As of June 30, 2007 andDecember 31, 2006, our borrowings consisted of the following:
| (In thousands)                    | ** ** | **June 30, 2007** | ** ** | **December 31, 2006** | ** ** |
|----------------------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| Senior  subordinated convertible notes |       | $                           | 21,965     |                            | $          | 21,965 |   |
| Senior secured  debentures             |       | 15,000                      |       | 15,000                          |       |
| Other term loans                       |       | 11                          |       | 17                              |       |
|                                   |       | 36,976                      |       | 36,982                          |       |
| Less current  portion                  |       | (1,135                      | )          | (10                             | )          |
| Total long-term  borrowings            |       | $                           | 35,841     |                            | $          | 36,972 |   |

 

***Senior Subordinated ConvertibleNotes***

In March 2006, weissued the Notes approximating a principal amount of $22 million in a privateplacement.  The Notes are secured by certain of our gas gathering assetsand mature 30 months from the date of issue.  The Notes bear interest at afixed rate of 10% per annum, payable quarterly in arrears.  A registrationstatement applicable to the shares of common stock underlying the Notes wasdeclared effective in June 2006.  The Notes do not contain any beneficialconversion features.  Note holders havethe right to convert the Notes to common stock at a conversion price of $7.00per share, which is subject to certain anti-dilution adjustments.  Inaddition, the Company is prohibited from declaring or paying cash dividends onthe common stock during the period that the Notes are outstanding and unpaid.

At June 30, 2006,debt issuance costs of the Notes totaling approximately $1 million, excludingthe value of warrants issued, were reflected as other non-current assetsand have been amortized as interest expense in each applicable period. For the six months ended June 30, 2007, $225,000 of the deferred cost of theNotes was amortized as interest expense and an additional $1,104,000 ofinterest paid in cash was expensed.

We followSFAS No. 133, “*Accounting forDerivative Instruments and Hedging Activities”* and EITF 00-19, *“Accounting for Derivative Financial Instruments Index to, andPotentially Settled in a Company’s Own Stock”* and the relatedpronouncements.  We have evaluated the conversion feature embedded in thesenior subordinated convertible Notes and the liquidated damages provision inthe related registration rights agreement and have determined that the entireamount of these securities is properly classified as long-term debt and is notaccounted for as a derivative on the consolidated balance sheet at June 30,2007.

***Senior Secured Debentures***

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

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

At June 30, 2007,debt issuance costs of the Debentures totaling approximately $1.1 million werereflected as other non-current assets and have been amortized as interestexpense in each applicable period.  Forthe six 

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months ended June 30,2007, $286,000 of the deferred cost of the Debentures was amortized as interestexpense and an additional $967,000 of interest paid in cash was expensed.

The amortizedportion of the discount on the Debentures of $1,039,000 was recorded asinterest expense during the six months ended June 30, 2007.

**Note6—Income Taxes**

A valuationallowance for deferred taxes at December 31, 2006 was $4.6 million.  As ofJune 30, 2007, no change has been made on the balance sheet to reflect anydeferred tax asset, as management believes that this allowance amount continuesto be reasonable and appropriate.  Theeffective income tax rate was 37% for the first half of 2007 and for the lastthree quarters of 2006.

In June 2006, theFASB issued FIN No. 48, “*Accounting for Uncertaintyin Income Taxes”*—*an interpretation of FASBStatement No. 109,* “*Accounting for IncomeTaxes.”*  FIN No. 48 addressesthe determination of whether tax benefits claimed or expected to be claimed ona tax return should be recorded in the financial statements.  Under FIN No. 48, we may recognize the taxbenefit from an uncertain tax position only if it is more likely than not thatthe tax position will be sustained on examination by the taxing authorities,based on the technical merits of the position. The tax benefits recognized in the financial statements from such aposition should be measured based on the largest benefit that has a greaterthan 50 percent likelihood of being realized upon ultimate settlement.  FIN No. 48 also provides guidance onderecognition, classification, recognizing interest and penalties on incometaxes accounting for taxes in interim periods, and it requires increaseddisclosures in financial statements.

We adopted theprovisions of FIN No. 48 effective January 1, 2007 and determined that therewas no adjustment required to retained earnings.  We would recognize potential accrued interestand penalties, if any, related to unrecognized tax benefits in income taxexpense, which is consistent with the recognition of these items in priorreporting periods.  No interest andpenalties related to uncertain tax positions were incurred as of June 30, 2007.

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

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

**Note 7—2007 Equity Incentive Plan**

Our shareholdersapproved the 2007 Equity Incentive Plan (the “2007 Plan”) at our annualshareholders’ meeting held May 31, 2007. The 2007 Plan replaces our previous Equity Compensation Plan (“OptionPlan”) that was adopted in May 2004. The 2007 Plan allows us to grant non-qualified stock options,shares of restricted stock or other types of equity-based compensation of up to20% of our outstanding shares to our non-employee directors, officers,employees and consultants.  Some of theseaward types were not available under the  Option Plan.  The 2007 Plan will be administered by acommittee appointed by the Board of Directors, which may grant options on suchterms, including vesting and payment forms, as it deems appropriate in itsdiscretion.  However, no option may beexercised more than 10 years after its grant, and the purchase price may not beless than 100% of the fair market value of our common stock on the date ofgrant.

All optionsgranted to date under both the 2007 Plan and the Option Plan have been grantedat exercise prices equal to or greater than the respective market prices of ourcommon stock on the grant dates.  Therewere 999,399 shares available for grant under the 2007 Plan as of June 30,2007.

The followingtable summarizes the activity for options:

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|                            | ** ** | **Six Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| ** **                 | ** ** | **June 30, 2007**    | ** ** | **June 30, 2006**    | ** ** |
| ** **                 | ** ** | **Number of**             | ** ** | **Weighted Avg.**         | ** ** | **Number of** | ** ** | **Weighted Avg.** | ** ** |
| ** **                 | ** ** | **Shares**                     | ** ** | **Exercise Price**        | ** ** | **Shares** | ** ** | **Exercise Price** | ** ** |
| Outstanding at  January 1, |       | 617,250                        |       | $                              | 6.35       |   | 463,250 |   | $ | 6.74 |   |
| Granted                    |       | 227,500                        |       | 3.99                           |       | 284,500 |   | 6.20 |   |
| Forfeited                  |       | (123,750                       | )          | 6.19                           |       | (88,500 | ) | 7.65 |   |
| Exercised                  |       | —                         |       | —                         |       | — |   | — |   |
| Outstanding at  June 30,   |       | 721,000                        |       | $                              | 5.71       |   | 659,250 |   | $ | 6.40 |   |
| Exercisable at June 30,    |       | 347,063                        |       | $                              | 5.62       |   | 333,125 |   | $ | 6.43 |   |

 

As of June 30,2007, the weighted average fair value of options granted during the previoussix months was $2.05, the weighted average remaining contractual life for theoptions outstanding is 6.5 years and the weighted average remaining contractuallife for the options exercisable is 3.0 years. The fair value of each option granted is estimated on the date of grantusing the Black-Scholes option valuation model.

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

We used thefollowing assumptions to estimate the fair value of options granted for the sixmonths ended June 30, 2007 and 2006:
|                                   | ** ** | **SFAS No. 123(R)**  | ** ** | **SFAS No. 123(R)**  | ** ** |
|-----------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| ** **                        | ** ** | **Six Months Ended** | ** ** | **Six Months Ended** | ** ** |
| ** **                        | ** ** | **June 30, 2007**    | ** ** | **June 30, 2006**    | ** ** |
| Expected life of  options         |       | 2.8  — 6.5 years          |       | 2.5  — 6.25 years         |       |
| Expected  volatility              |       | 70%  — 80%                |       | 80%                            |       |
| Risk-free  interest rate          |       | 4.76  — 5.12%             |       | 4.31  — 5.23%             |       |
| Expected dividend yield  of stock |       | 0%                             |       | 0%                             |       |

 

**Note 8 — Segment Information**

SFAS No. 131, “*Disclosures about Segments of an Enterprise andRelated Information*” establishes standards for the way in whichpublic companies disclose certain information about operating segments in theirfinancial reports.  Consistent with SFASNo. 131, we have defined three reportable segments, described below, based onfactors such as how we manage operations and how the chief operating decisionmakers view results.  We consider ourchief executive officer and our chief operating officer as our chief operatingdecision makers.

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

Our operationsduring the first half of 2007 in this segment include developing, producing andmarketing natural gas primarily from coal-bed methane wells.  Our exploitation and production segmentcurrently operates in the Powder River Basin area of Wyoming and theDenver-Julesburg (“D-J”) Basin in Colorado.

***Gas Gathering and Processing Segment***

We own and operategas gathering and processing systems that we acquired from 2004 through2006.  We charge a fee to our customersfor gathering and processing services based on volumes of gas transported,based on a monthly minimum fee and/or based on the level of compressionservices provided.  We have acquired gasgathering contracts that include operating leases, with respect to surface-userights, that are cancelable in the event that gas gathering activities cease asa result of declining production.  Wealso have cancelable purchase commitments with third-party providers for futurefield operations, equipment and maintenance activities.

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***CorporateSegment***

This segmentcontains the overall corporate headquarter functions and costs that areprimarily staff G&A, legal and professional services, furniture andequipment and debt financing arrangements.

|                         | ** ** | **Three Months Ended June 30, 2007** | ** ** |
|-------------------------|------------|---------------------------------------------------------------|------------|
| ** **              | ** ** | **Exploitation**                                              | ** ** | **Gathering** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **              | ** ** | **and**                                                       | ** ** | **and** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **(In thousands)** | ** ** | **Production**                                                | ** ** | **Processing** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| Revenues                |       | $                                                             | 346        |   | $ | 364 |   | $ | 10 |   | $ | 720 |   |
| Net loss                |       | $                                                             | (876       | ) | $ | (523 | ) | $ | (2,529 | ) | $ | (3,928 | ) |

 
|                              | ** ** | **Six Months Ended June 30, 2007** | ** ** |
|------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                   | ** ** | **Exploration**                                             | ** ** | **Gathering** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                   | ** ** | **and**                                                     | ** ** | **and** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **(In thousands)**      | ** ** | **Production**                                              | ** ** | **Processing** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| Revenues                     |       | $                                                           | 759        |   | $ | 872 |   | $ | 14 |   | $ | 1,645 |   |
| Net loss                     |       | $                                                           | (1,432     | ) | $ | (1,062 | ) | $ | (5,864 | ) | $ | (8,358 | ) |
| Identifiable  assets:        |       |                                                        |       |   |   |   |   |   |   |
| Oil and gas  properties, net |       | $                                                           | 18,993     |   | $ | — |   | $ | — |   | $ | 18,993 |   |
| Property and  equipment, net |       | $                                                           | —     |   | $ | 11,774 |   | $ | 640 |   | $ | 12,414 |   |
| Other  non-current assets    |       | $                                                           | —     |   | $ | 1,389 |   | $ | 2,446 |   | $ | 3,835 |   |
|                         |       |                                                        |       |   |   |   |   |   |   |

 

**Note 9—Related Party Transactions**

Susan Wright, wifeof our CEO and a corporate officer, provides services to us as the CorporateSecretary on a contractual basis.  Duringthe six months ended June 30, 2007, Ms. Wright was paid $67,375 for thesecontract services.

On January 9 andJune 1, 2007, we issued 15,000 and 50,000 warrants, respectively, to two formerdirectors for services rendered.  Thesewarrants vested immediately on the date of grant with an exercise price of $4.50per share.  We recorded approximately$81,000 as the estimated fair value of the warrants as stock-basedcompensation, with a corresponding increase in additional paid-in-capital.

One of ourofficers (and a director) and three of our directors, in the aggregate,purchased $100,000 and a total of $1,275,000, respectively, of the Notes thatwere issued in the first quarter of 2006. During the six months ended June 30, 2007, we paid interest of $5,000and $64,000, respectively, on these Notes. In addition, an investment fund, of which one of our former directors isa consultant, purchased on behalf of its investors, $1,000,000 of theNotes.  The investors were paid $50,000in interest during the same period.

**Note 10 —Subsequent Events**

***Restricted Stock Granted to an Officer***

In connection withthe approval by the shareholders in May 2007 of the 2007 Equity Incentive Plan,in July 2007 the Board of Directors awarded 120,000 restricted shares of ourcommon stock to our President and COO.  Underthe award agreement, the shares will vest based on the satisfaction of certainperformance measures over the next three years.

***Release of Restricted Cash underthe Pennaco Energy, Inc. (“Pennaco”) Agreement***

In July 2007,Pennaco released $2,000,000 of restricted cash plus interest in accordance withthe Purchase and Sale Agreement between Pennaco and us in connection with aportion of the plugging liability for wells acquired from Pennaco, in June2006.  This cash is currently availableas additional general corporate working capital.

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

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

**Statementof Forward-Looking Statements**

This quarterlyreport on Form 10-Q contains forward-looking statements within the meaning ofSection 27A of the Securities Act of 1933, as amended, andSection 21E of the Securities Exchange Act of 1934, as amended.  These statements identify prospectiveinformation.  Important factors couldcause actual results to differ, possibly materially, from those in theforward-looking statements.  In somecases you can identify forward-looking statements by words such as “anticipate,”“believe,” “could,” “estimate,” “expect,” “plan,” “intend,” “may,” “should,” “will”and “would” or other similar words.  Youshould read statements that contain these words carefully because they discussour future expectations, contain projections of our future results ofoperations or of our financial position or state other “forward-looking”information.  We believe that it isimportant to communicate our future expectations to our investors.  There may, however, be events in the futurethat we are not able to accurately predict or control.  These forward-looking statements are subjectto a number of risks, uncertainties and assumptions, including those listedunder item 1A “Risk Factors” in our Annual Report on Form 10-K for the yearended December 31, 2006.

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

You should readthe following discussion in conjunction with the financial statements andrelated notes in Item 1 and our Annual Report on Form 10-K for the year endedDecember 31, 2006.

**GeneralOverview**

We are anindependent energy company engaged in the acquisition, exploitation,development and production of natural gas and oil.  In addition, we provide gas gathering,processing and compression services for properties we operate and forthird-party producers.  We were initiallyformed under the name “PRB Transportation, Inc.” in December 2003 and wereincorporated in the State of Nevada.  OnJune 14, 2006, PRB’s name was changed to “PRB Energy, Inc.”  PRB conducts its primary business activitiesin Wyoming, Colorado, and Nebraska.  PRB operates through two wholly-ownedsubsidiaries:  PRB Oil and Gas, Inc., anoil and gas exploitation and production company and PRB Gathering, Inc., agathering and processing company.

**FirstSix Months of 2007 - Operational and Financial Highlights**

During the first six months of 2007, we had minimal new drillingactivities, as we concentrated on dewatering the Wyoming coal-bed methane (“CBM”) wells and preparing theColorado Niobrara drilling program for the second half of this year.  We had 220 gross (179 net) CBM wells inWyoming and 9 gross/net Niobrara wells in Colorado producing commercialgas.  In Wyoming, we also had 80 gross(63 net) CBM wells in the dewatering stage. We sold 149,000 thousand cubic feet (“Mcf”) of gas in Wyoming and 52,000Mcf in Colorado, which resulted in sales of $571,000 and $188,000,respectively.  Our gathering operationsgenerated revenues of $872,000 for the same period of 2006.

For the first half of 2007, we had a net loss of $8.4 million.  Nearly half of this loss was due to interestexpense and amortized costs related to the debt previously incurred in2006.  These expenses for the first sixmonths consisted of three main categories. The first category is the interest payments for the Senior SubordinatedConvertible Notes (“Notes”) and Senior Secured Debentures (“Debentures”) of$2,071,000.  A second category consistsof discount and debt issuance costs related to the Notes and Debenturesamortized for $1,550,000.  The lastcategory was $555,000 of interest expense associated with a capital leaseobligation, less

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 $159,000 of capitalized interest related todrilling costs of wells.  (See Note 5 ofPart I in this Quarterly Report on Form 10-Q.)

The balance of the net loss for the six months was primarily due to ourinability to produce or gather gas during severe winter weather conditions andother mechanical problems.  The weatherproblems affected our Wyoming properties early in the first quarter of 2007 dueto water freezing in the gathering lines. Also, a reciprocating compressor had mechanical problems interruptinggas gathering operations.  Theseproduction problems were substantially remedied by the end of the secondquarter.  In addition, the averagerealized price per Mcf for Wyoming and Colorado properties combined declined$.96 or 22% from the first to second quarters of 2007, or $4.27 to $3.31,respectively.  The six-month averagerealized price for this period of $3.77 per Mcf reflected the downward trend ofthe basin price index during the second quarter.  The regional Powder River Basin basisdifferential (discount from Henry Hub gas market pricing index) based on ourCIG price index ranged between $1.00 to $2.00 in the first quarter and wasfurther eroded to a range of $3.00 to $5.00 differential in the second quarter.

In the firstquarter, we entered into a five-year lease agreement with J-W Power Company (“J-WPower”) in January 2007.  Under the terms of the agreement, J-W Power willsupply us with gas compression equipment and related services.  Thecompression equipment will service our gas gathering pipelines in the PowderRiver Basin.

In May 2007, weannounced that we had reached a settlement with Rocky Mountain Gas Inc. (“RMG”)and terminated the previously reported arbitration proceedings.  RMG agreed to pay PRB $3,250,000 total,represented by two cash payments of $500,000 made on May 22nd and June 21st, 2007, with the balance due on October31, 2007.  Both cash payments werereceived on the scheduled dates by PRB. A promissory note dated June 1, 2007 (the “RMG Note”) for the remainingbalance was also received from RMG.  TheRMG Note bears an interest rate of 10% per annum and is secured by a mortgage.

In addition as ofJune 1, 2007, RMG assigned to us all of its interests, includinginfrastructure, in the Moyer coal-bed methane wells located in Section 19,T48N, R71W, adjacent to PRB’s acreage in . In turn, we assigned to RMG all of our interests (other thanSection 19) in the acreage and wells (“PRB Assets”) originally included inthe farmout agreement with RMG.

**Wewill recognize a** total reported gain from thissettlement of $1,267,000 over the second through fourth quarters of thisyear.  As cash is received, a proportionof the total gain will be recognized in the financial statements.  The portion of the gain including interest fromthis settlement that is reflected for the first six months of 2007 is $384,000.

On June 15, 2007,as a condition for obtaining the consent of the lenders, who held a securityinterest in the PRB Assets to be transferred to RMG, we agreed to pay the lenders,as a reduction of our outstanding balance due on the Debentures, one-half ofthe final $2,250,000 payment to be received from RMG.  Under our agreement with the lenders, uponreceipt of the RMG payment we will pay the lenders $1,125,000, plus any associatedinterest and fees due under the provisions of the Debentures.  The payment to the lenders will partiallyredeem, on a pro rata basis, a portion of the principal and interest amountsdue under the Debentures.

**Resultsof Operations**

***Threemonths ended June 30, 2007 (unaudited) compared to the three months ended June30, 2006 (unaudited)***

 Thefinancial information with respect to the three months ended June 30, 2007 and2006, which is discussed below, is unaudited. In the opinion of management,such information contains all adjustments, consisting only of normal recurringaccruals, necessary for a fair presentation of the results for such periods. Theresults of operations for interim periods are not necessarily indicative of theresults of operations for the full fiscal year.

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|                                           | ** ** | ** **                                | ** ** | ** **     | ** ** | **Increase /**       | ** ** | **Percentage**            | ** ** |
|-------------------------------------------|------------|-------------------------------------------|------------|----------------|------------|---------------------------|------------|---------------------------|------------|
| ** **                                | ** ** | **Quarter Ended June 30,** | ** ** | **(Decrease)** | ** ** | **Change**                | ** ** |
| **(Dollars in thousands)**      | ** ** | **2007**                                  | ** ** | **2006**       | ** ** | **2007 v 2006** | ** ** | **2007 v 2006** | ** ** |
| **Revenue**                               | ** ** | ** **                                | ** ** | ** **     | ** ** | ** **                | ** ** | ** **                | ** ** |
| Natural gas  sales                        |       | $                                         | 346        |           | $          | 48                        |       | $                         | 298        |   |   | * |
| Gas gathering  and processing             |       | 364                                       |       | 603            |       | (239                      | )          | (40                       | )%         |
| Other                                     |       | 10                                        |       | 52             |       | (42                       | )          | (81                       | )%         |
| Total revenue                             |       | 720                                       |       | 703            |       | 17                        |       | 2                         | %          |
| Natural gas  gathering expenses and taxes |       | (84                                       | )          | (20            | )          | (64                       | )          |                      | *          |
| **Net revenue**                           | ** ** | **636**                                   | ** ** | **683**        | ** ** | **(47**                   | **)**      | **(7**                    | **)%**     |
| **Operating  expenses**                   | ** ** | ** **                                | ** ** | ** **     | ** ** | ** **                | ** ** | ** **                | ** ** |
| Natural gas  lease operating              |       | 612                                       |       | —         |       | 612                       |       |                      | *          |
| Gas gathering  and processing operations  |       | 593                                       |       | 648            |       | (55                       | )          | (8                        | )%         |
| General and  administrative               |       | 1,194                                     |       | 1,129          |       | 65                        |       | 6                         | %          |
| Depreciation,  depletion and amortization |       | 951                                       |       | 336            |       | 615                       |       | 183                       | %          |
| Other expense                             |       | —                                    |       | 48             |       | (48                       | )          |                      | *          |
| **Total expenses**                        | ** ** | **3,350**                                 | ** ** | **2,161**      | ** ** | **1,189**                 | ** ** | **55**                    | **%**      |
| **Operating  loss**                       | ** ** | **(2,714**                                | **)**      | **(1,478**     | **)**      | **(1,236**                | **)**      | **(83**                   | **)%**     |
|                                      |       |                                      |       |           |       |                      |       |                      |       |
| Interest and  other income (expense), net |       | (1,214                                    | )          | (340           | )          | (874                      | )          |                      | *          |
| **Net  loss**                             | ** ** | **$**                                     | **(3,928** | **)**          | **$**      | **(1,818**                | **)**      | **$**                     | **(2,110** | **)** | **(116** | **)%** |

 

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

***Revenues***

The $298,000increase in natural gas sales over 2006 was substantially offset by the $239,000reduction in gas gathering fees no longer received from Pennaco as a result ofthe acquisition from Pennaco in June 2006. During the second quarter of 2006,we also had Other Revenue of $52,000 for management fees, but none in 2007,because the RMG agreement ended on June 30, 2006.

***Natural Gas Lease Operating Expenses***

Natural gas leaseoperating expenses in 2007 increased $612,000 over 2006 as a result of thefield operations acquired in mid 2006.  We substantially increased fieldoperations over the same period last year as a result of the Pennaco (Wyoming)and D-J Basin (Colorado) acquisitions.

***Gas Gathering and Processing Operations Expenses***

Gas gathering andprocessing operations expenses decreased $55,000, or 8%, for the currentquarter compared to last year’s quarter primarily due to the January 2007capital lease agreement and to reduced third-party services.

***General and Administrative Expenses***

General andadministrative (“G&A”) expenses increased over 2006 by $65,000, or 6%, dueto employee compensation and benefits increasing as a result of employees addedin response to an increase in operations, offset by recoveries of expensesallocated to operational projects, including $200,000 of G&A recoveryrelated to the design and engineering services for a processing plant for athird party.

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

DD&A expensein 2007 increased $615,000, or 183%, as a result from the acquired propertiesin mid and late 2006.

***Interest and Other Income and Expense***

Interest expensefor the quarter ending June 30, 2007 increased $1,412,000, three times over2006 due to (1) interest payments on Debentures and capital lease and (2)amortization of the debt issuance costs and the 

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discount onDebentures.  The interest increase waspartially offset by the gain on the sale of the RMG assets of $343,000, net ofa loss of approximately $100,000 on the sale of other gathering assets, andother income of $427,000 for the design and engineering services related to aprocessing plant for a third party, net of a reduction of interest income ofapproximately $120,000.

***Sixmonths ended June 30, 2007 (unaudited) compared to the six months ended June30, 2006 (unaudited)***

The financialinformation with respect to the six months ended June 30, 2007 and 2006, whichis discussed below, is unaudited. In the opinion of management, suchinformation contains all adjustments, consisting only of normal recurringaccruals, necessary for a fair presentation of the results for such periods.The results of operations for interim periods are not necessarily indicative ofthe results of operations for the full fiscal year.
|                                           | ** ** | ** **                                        | ** ** | ** **     | ** ** | **Increase /**       | ** ** | **Percentage**            | ** ** |
|-------------------------------------------|------------|---------------------------------------------------|------------|----------------|------------|---------------------------|------------|---------------------------|------------|
| ** **                                | ** ** | **Six Months Ended June 30,** | ** ** | **(Decrease)** | ** ** | **Change**                | ** ** |
| ** **                                | ** ** | **2007**                                          | ** ** | **2006**       | ** ** | **2007 v 2006** | ** ** | **2007 v 2006** | ** ** |
| ** **                                | ** ** | **(Dollars in thousands)**              | ** ** |
| **Revenue**                               | ** ** | ** **                                        | ** ** | ** **     | ** ** | ** **                | ** ** | ** **                | ** ** |
| Natural gas  sales                        |       | $                                                 | 759        |           | $          | 106                       |       | $                         | 653        |   |   | * |
| Gas gathering  and processing             |       | 872                                               |       | 1,278          |       | (406                      | )          | (32                       | )%         |
| Other                                     |       | 14                                                |       | 146            |       | (132                      | )          | (90                       | )%         |
| Total revenue                             |       | 1,645                                             |       | 1,530          |       | 115                       |       | 8                         | %          |
| Natural gas  gathering expenses and taxes |       | (180                                              | )          | (39            | )          | (141                      | )          |                      | *          |
| **Net revenue**                           | ** ** | **1,465**                                         | ** ** | **1,491**      | ** ** | **(26**                   | **)**      | **(2**                    | **)%**     |
| **Operating  expenses**                   | ** ** | ** **                                        | ** ** | ** **     | ** ** | ** **                | ** ** | ** **                | ** ** |
| Natural gas  lease operating              |       | 1,273                                             |       | —         |       | 1,273                     |       |                      | *          |
| Gas gathering  and processing operations  |       | 1,026                                             |       | 1,217          |       | (191                      | )          | (16                       | )%         |
| General and  administrative               |       | 2,794                                             |       | 2,146          |       | 648                       |       | 30                        | %          |
| Depreciation,  depletion and amortization |       | 1,806                                             |       | 656            |       | 1,150                     |       | 175                       | %          |
| Other expense                             |       | — 0                                          |       | 223            |       | (223                      | )          |                      | *          |
| **Total expenses**                        | ** ** | **6,899**                                         | ** ** | **4,242**      | ** ** | **2,657**                 | ** ** | **63**                    | **%**      |
| **Operating  loss**                       | ** ** | **(5,434**                                        | **)**      | **(2,751**     | **)**      | **(2,683**                | **)**      | **(98**                   | **)%**     |
| Interest and other income (expense), net  |       | (2,924                                            | )          | (561           | )          | (2,363                    | )          |                      | *          |
| **Net  loss**                             | ** ** | **$**                                             | **(8,358** | **)**          | **$**      | **(3,312**                | **)**      | **(5,046**                | **)**      | **(152** | **)%** |
|                                           |            |                                                   |            |                |            |                           |            |                           |            |  |  |  |

 

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

***Revenues***

Total revenuesincreased $115,000, or 8%, for the six months ended June 30, 2007 compared tolast year’s results of natural gas sales from the Pennaco properties acquiredin mid 2006.  The $653,000 increase innatural gas sales was substantially offset by the $406,000 reduction of gasgathering fees no longer received from Pennaco as a result of the acquisitionfrom Pennaco in June 2006. Other Revenue included management fees of $146,000during the first two quarters of 2006, but none in 2007, because the RMGagreement ended on June 30, 2006.

***Natural Gas Lease Operating Expenses***

Natural gas leaseoperating expenses in 2007 increased $1,273,000 over 2006 as a result of thefield operations acquired in mid 2006.  We substantially increased fieldoperations over the same period last year as a result of the Pennaco (Wyoming)and D-J Basin (Colorado/Nebraska) acquisitions.

***Gas Gathering and Processing Operations Expenses***

Gas gathering andprocessing operations expenses decreased $191,000, or 16%, for the six monthsended June 30, 2007 compared to last year’s results primarily due to theJanuary 2007 capital lease agreement and to reduced third-party services.

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***General and Administrative Expenses***

General andadministrative expenses increased over 2006 by $648,000, or 30%, due toemployee compensation and benefits increasing as a result of employees added inresponse to an increase in operations, offset by recoveries of expensesallocated to operational projects, including $200,000 of G&A recoveryrelated to the design and engineering services for a processing plant for a thirdparty.

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

DD&A expensein 2007 increased $1,150,000, or 175%, as a result of properties acquired inmid and late 2006.

***Interest and Other Income and Expense***

Interest expensefor the six months ending June 30, 2007 increased $2,985,000, nearly four timesover 2006 due to (1) interest payments on convertible Notes, Debentures and acapital lease and (2) amortization of the debt issuance costs and the discounton Debentures.  The interest increase waspartially offset by the gain on the sale of the RMG assets of $343,000, net ofa loss of approximately $100,000 on other gathering assets, and other income of$427,000 for the design and engineering services related to a processing plantfor a third party, net of a reduction of interest income of approximately$45,000.

**Liquidityand Capital Resources**

***Cash Flows and Capital Expenditures***

At June 30, 2007,cash and cash equivalents totaled $2.9 million. Additionally, we have $3.1 million of restricted cash, of which $2.1million is classified as a current asset and $1.0 million as a non-currentasset.  The $3.1 million collateralizes areducing letter of credit issued in connection with potential plugging liabilitiesof Wyoming properties acquired in June 2006. In July 2007, $2.0 million of the restricted cash plus interest wasreleased under the terms of the letter of credit.  The remaining $1.0 million of restricted cashwill be released on or before June 30, 2009. At June 30, 2007, working capital, excluding the restricted cash, was$4.5 million.

In 2006, we raisedapproximately $22 million by issuing the Notes and $15 million, beforeexpenses, by issuing the Debentures. These funds have been utilized in the exploitation, development andacquisition of properties in Wyoming and Colorado and will provide for thefurther development of these areas.

We believe that our cash and cash equivalents on hand,internally generated cash flows and future financing activities will requireaugmentation from bank financing, asset sales or other equity or debt financingto fund our operations, planned drilling, acquisition and other capitalexpenditures in the future.  The amountand allocation of future capital and exploitation expenditures will depend upona number of factors including the number and size of acquisitions and drillingopportunities, our cash flows from operating and financing activities and ourability to assimilate acquisitions. Also, the impact of oil and gas market prices on investment opportunities,the availability of capital and borrowing facilities and the success of ourexploitation and development activities, particularly in Colorado, could leadto changes in funding requirements for future development.  If we failed to secure financing for thefuture development, we would pursue other financial arrangements through jointventure partners, farm-out agreements or the sale of assets.

*CashFlow Used in Operating Activities*

During the sixmonths ended June 30, 2007, our net loss of $8.4 million included non-cashcharges of $1.8 million of DD&A expense, $1.5 million of interest expenseresulting from amortization of debt issuance costs and discount on theDebentures and $417,000 of share-based compensation expense.

Cash used inoperating activities of $6.5 million during the six months of 2007 was $3.8million greater than the same period of 2006. This increase was mainly attributable to higher debt interest payments,general and administrative expenses due to staff increases and increased fieldoperations of acquired and developed gas properties.

*CashFlow Used in Investing Activities*

Cash used ininvesting activities was $2.5 million during the six months ended June, 30 2007representing a 72% decrease of $6.8 million compared to 2006.   The primary reasons for the reduction werethe removal of 

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the $3.0 million ofrestricted cash from available cash balances in 2006, and approximately $3.6million in reduced drilling and gathering activities in the first half of thisyear compared to last year.

At June 30, 2007,wells in progress consisted of 80 gross (63 net) CBM wells in various stages ofcompletion.  None of these wells are in an area requiring majorcapital expenditures before production may begin, nor were any of these wells completedmore than one year ago.  These wells are being completed or are undergoingde-watering processes.  We believe that after the wells have beende-watered, we will be able to commence production.

Currently, our2007 capital expenditures are expected to approximate $21 million, of which $19million will be related to gas exploitation and development prospects andapproximately $2 million to gas gathering system projects.  We spent approximately $1 million, net, duringthe first six months of 2007, with approximately $18 million in the second halfof this year primarily earmarked for the gas exploitation drilling program inthe northeastern Colorado D-J Basin.

*CashFlow from Financing Activities*

Cash provided byfinancing activities was $900,000 for the six months ended June 30, 2007, or areduction of $20 million from 2006.  During the first quarter of 2006, weraised $22 million from the issuance of Notes and incurred approximately $1million in debt issuance costs, excluding the value of warrants issued. The 2007 financings included the RMG settlement proceeds received of $1million, offset by additional Debenture costs totaling $135,000.

*OffBalance-Sheet Arrangements**.***

We do not have anyoff-balance sheet financing arrangements as of June 30, 2007, except for ourStorm Cat gas gathering services agreement (“Agreement”).  The Agreementrequires Storm Cat to pay us gas gathering fees on specific minimum volumes ofgas, whether or not those volumes are delivered and transported through oursystem.  The Agreement has a 10-year term expiring January 2016, withcertain minimum payments during the first 3 years of the Agreement.  TheAgreement allows for a cash true-up payment at each year-end if the annualvolume commitment under the Agreement is not met.

**CriticalAccounting Policies and Estimates**

We refer you tothe corresponding section in Part II, Item 7 of our 2006 Annual Report on Form10-K and to the footnote disclosures included in Part I, Item 1 of this report.

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

There have been nomaterial changes in market risk from the information provided under “Quantitativeand Qualitative Disclosures about Market Risk” in Item 7A of our AnnualReport on Form 10-K for the fiscal year ended December 31, 2006.

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

We maintaindisclosure controls and procedures as defined in Section 13 a - 15 (e) and 15 d- 15 (e) of the Securities Exchange Act of 1934 designed to provide reasonableassurance that information required to be disclosed in our reports is recorded,processed, summarized and reported within the time periods specified in the SEC’srules and forms, and that such information is accumulated and communicatedto our management, including our Chief Executive Officer and PrincipalFinancial Officer, to allow timely decisions regarding requireddisclosure.  Our management, with theparticipation and oversight of our Chief Executive Officer and PrincipalFinancial Officer, evaluated the design and effectiveness of our disclosurecontrols and procedures as of June 30, 2007. Based on this evaluation, our Chief Executive Officer and our PrincipalFinancial Officer have concluded that our disclosure controls and procedureswere effective, as of June 30, 2007.

During the periodcovered by this report, there were no changes in our internal control overfinancial reporting that have materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting.

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**PART II OTHER INFORMATION**

**ITEM1:    LEGAL PROCEEDINGS**

Rocky Mountain GasInc. (“RMG”) filed an arbitration demand against us in 2006.  (Refer toPart I, Item 3 in. our 2006 Annual Report on Form 10-K regarding the RockyMountain Gas Agreement and Claims Dispute.)

On May 15, 2007,we reached a settlement with RMG and terminated the previously reportedarbitration proceedings.  RMG agreedto pay us $3,250,000.  In addition, as ofJune 1, 2007, RMG assigned to us all of its interests, including infrastructure,for the Moyer CBM wells located in Section 19, T48N, R71W, adjacent to PRB’sacreage.  In turn, we assigned toRMG all of our interests (other than Section 19) in the acreage originallyincluded in the farmout agreement with RMG.

**ITEM1A. RISK FACTORS**

Forinformation regarding factors that could affect our results of operations,financial condition and liquidity, see the risk factors discussion providedunder Item 1A of our 2006 Annual Report on Form 10-K.  See also “Forward-Looking Statements”included in Part I, Item 2 of this Quarterly Report on Form 10-Q.

**ITEM2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

None.

**ITEM3: DEFAULTS UPON SENIOR SECURITIES**

None.

**ITEM 4:SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

On May 31, 2007 theCompany held its 2007 Annual Meeting of Shareholders.  Each of thefollowing persons was elected a director of the Company for one-year termsexpiring at the earlier of the 2008 Annual Meeting of Stockholders or upon asuccessor being elected and qualified:
| Name                  | ** ** | **Votes For** | ** ** | **Votes Withheld** | ** ** |
|-----------------------|------------|--------------------|------------|-------------------------|------------|
| Gus J. Blass III      |       | 7,933,245          |       | 120,806                 |       |
| William F.  Hayworth  |       | 7,933,245          |       | 120,806                 |       |
| Reuben Sandler        |       | 7,918,645          |       | 135,406                 |       |
| James P. Schadt       |       | 7,919,645          |       | 134,406                 |       |
| Robert W. Wright      |       | 7,943,245          |       | 110,806                 |       |
| Paul L. Maddock,  Jr. |       | 7,928,645          |       | 125,406                 |       |
| Sigmund J. Rosenfeld  |       | 7,921,145          |       | 132,906                 |       |

 

The shareholders of theCompany also approved the adoption of the Company’s 2007 Equity IncentivePlan.  The voting results were asfollows:
| Votes For:     | 4,453,510 |
|----------------|-----------|
| Votes Against: | 375,252   |

 

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| Votes Abstain:   | 14,200    |
|------------------|-----------|
| Broker Nonvotes: | 3,211,089 |

 

**ITEM5: OTHER INFORMATION**

None.

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**ITEM6:    EXHIBITS**
| Exhibit    | ** ** | ** **                                                                                                                                                                                                                                                                          |
|------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number** | ** ** | **Description**                                                                                                                                                                                                                                                                     |
| (3.1)      |       | Amended Articles of Incorporation of the Registrant  (filed as an exhibit to Form S-1/A filed on January 28, 2005 and  incorporated by reference herein).                                                                                                                 |
| (3.3)      |       | Amended By-laws of the Registrant (filed as an  exhibit to Form S-1/A filed on January 28, 2005 and incorporated by  reference herein).                                                                                                                                   |
| (4.5)      |       | Form of Common Stock Certificate (filed as an  exhibit to Form 8-A filed on April 8, 2005).                                                                                                                                                                               |
| (4.6)      |       | Form of Senior Subordinated Convertible Note  (filed on annual Form 10-K filed on April 14, 2006 and incorporated by  reference herein).                                                                                                                                  |
| (4.7)      |       | Form of Registration Rights Agreement between  the Company and the holders of the Company’s Senior Subordinated Convertible  Notes (filed on annual Form 10-K filed on April 14, 2006 and  incorporated by reference herein).                                        |
| (4.8)      |       | Form of Senior Secured Debentures (filed as an  exhibit to Form 8-K filed on January 5, 2007 and incorporated by reference  herein)                                                                                                                                                 |
| (4.9)      |       | Pledge and Security Agreement, dated as of December  28, 2006, by and among PRB Energy, Inc., PRB Oil & Gas, Inc., PRB  Gathering, Inc., and the Secured Parties named therein (filed as an exhibit  to Form 8-K filed on January 5, 2007 and incorporated by reference herein) |
| (4.10)     |       | Secured Guaranty, dated as of December 28, 2006,  made by PRB Energy, Inc. and PRB Gathering, Inc. (filed as an exhibit to Form  8-K filed on January 5, 2007 and incorporated by reference herein)                                                                                 |
| (4.11)     |       | Registration Rights Agreement, dated as of December  28, 2006, by and among PRB Energy, Inc. and the Buyers named therein (filed  as an exhibit to Form 8-K filed on January 5, 2007 and incorporated by  reference herein)                                                         |
| 10.24a     |       | RMG Settlement Agreement between PRB Energy, Inc.  and Rocky Mountain Gas Inc., dated May 15, 2007                                                                                                                                                                                  |
| 10.24b     |       | RMG Settlement Agreement between PRB Energy, Inc.  and Rocky Mountain Gas Inc., dated May 16, 2007                                                                                                                                                                                  |
| 10.25      |       | Letter agreement between PRB Energy, Inc and DKR  Soundshore Oasis Holding Fund Ltd. along with West Coast Opportunity Fund,  LLC dated June 15, 2007                                                                                                                               |
| 31.1       |       | Chief Executive Officer Certification pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                              |
| 31.2       |       | Principal Financial Officer Certification pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                          |
| 32.1       |       | Chief Executive Officer and Principal Financial  Officer Certifications pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                        |

 

These exhibits areavailable upon request.  Exhibitsidentified in parentheses above are on file with the SEC and are incorporatedherein by reference.  All other exhibitsare provided as part of this electronic submission.

----

( )                                          Previouslyfiled.

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**SIGNATURE**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
|                        | PRB Energy, Inc. |
|------------------------|------------------|
|                   | (Registrant)     |
|                   |             |   |
|                   | By:              | /s/ Robert W. Wright |
|                   |             | Name: Robert W. Wright |
|                   |             | Title: Chairman and Chief Executive Officer |
|                   |             |   |
|                   | By:              | /s/ Daniel D. Reichel |
|                   |             | Name: Daniel D. Reichel |
|                   |             | Title: Vice President—Finance and Treasurer |
|                   |             | (Principal Financial Officer) |
|                   |             |   |
|                   |             |   |
| Dated: August 14, 2007 |             |   |

 

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