**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.20549**

 

**Form 10-Q**

 

**(MarkOne)**

 

| **ý** | ** ** | **QUARTERLY REPORT PURSUANT TO   SECTION 13 OR 15(d)** |
|------------|------------|-------------------------------------------------------------------------------------------|
| ** ** | ** ** | **OF THE  SECURITIES EXCHANGE ACT OF 1934**                                               |

 

**For the quarterly period ended March31, 2006**

 

**or**

 

| **o**      | ** ** | **TRANSITION REPORT PURSUANT TO   SECTION 13 OR 15(d)** |
|------------|------------|--------------------------------------------------------------------------------------------|
| ** ** | ** ** | **OF THE  SECURITIES EXCHANGE ACT OF 1934**                                                |

 

**For the transition period from           to           **

 

**Commission file number 001-32471**

 

**PRB Gas Transportation, Inc.**

(Exact Name ofRegistrant as Specified in its Charter) 

 

| **Nevada**

(State or Other  Jurisdiction  of Incorporation or Organization)             | ** ** | **20-0563497**

(I.R.S. Employer  Identification No.) |
|------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|
|                                                                                     |       |                                                  |
| **1875  Lawrence Street, Suite 450  Denver, CO**(Address of Principal Executive Offices) | ** ** | **80202**(Zip Code)                                   |

 

Telephone Number: **(303) 308-1330**

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant was requiredto file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes ý  No o

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act).    Yes o    No ý

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).    Yes o    No ý

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date.

 
| **Class**                       | ** ** | **Outstanding as of May 10, 2006** |
|---------------------------------|------------|------------------------------------|
| Common Stock,  $0.001 par value |       | 7,471,894 Shares                   |

 

 

----

 

**TABLE OF CONTENTS**

 
| ** **   | **Caption**                                                                                                                                                                                                                            | ** ** | ** ** |
|--------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|
|         | PART I — Financial Information                                                                                                                                                                                               |       |       |
| Item 1. | Financial Statements                                                                                                                                                                                                                   |       |       |
| Item 2. | Management’s Discussion and  Analysis of Financial Condition and Results of Operations and Cautionary  Statements for Purposes of the “Safe Harbor” Provisions of the Private  Securities Litigation Reform Act of 1995 |       |       |
| Item 3. | Quantitative and Qualitative  Disclosures About Market Risk                                                                                                                                                                            |       |       |
| Item 4. | Controls and Procedures                                                                                                                                                                                                                |       |       |
|         | PART II — Other Information                                                                                                                                                                                                  |       |       |
| Item 1. | Legal Proceedings                                                                                                                                                                                                                      |       |       |
| Item 1A.     | Risk Factors                                                                                                                                                                                                                           |       |       |
| Item 2. | Unregistered Sales of Equity  Securities and Use of Proceeds                                                                                                                                                                           |       |       |
| Item 3. | Defaults Upon Senior  Securities                                                                                                                                                                                                       |       |       |
| Item 4. | Submission of Matters to a  Vote of Security Holders                                                                                                                                                                                   |       |       |
| Item 5. | Other Information                                                                                                                                                                                                                      |       |       |
| Item 6. | Exhibits and Reports on Form 8-K                                                                                                                                                                                                       |       |       |
|         | Signatures                                                                                                                                                                                                                             |       |       |

 

When we refer to“PRB,” “us,” “we,” or “our” we are describing PRB Gas Transportation, Inc. andits subsidiary.

 

----

 

**PART I — FINANCIAL INFORMATION**

 

**Item 1. FinancialStatements**

 

**PRB GasTransportation, Inc.****Condensed Consolidated Balance Sheets**

**(Inthousands, except share amounts)**

 
| ** **                                                                                                                                                                                                          | ** ** | **March 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                          | ** ** | **(Unaudited)**     | ** ** | ** **                  | ** ** |
| **Assets**                                                                                                                                                                                                          | ** ** | ** **          | ** ** | ** **                  | ** ** |
| Current assets:                                                                                                                                                                                                     |       |                |       |                        |       |
| Cash and cash  equivalents                                                                                                                                                                                          |       | $                   | 22,648     |                        | $          | 6,434 |   |
| Accounts  receivable                                                                                                                                                                                                |       | 1,235               |       | 789                         |       |
| Inventory –  material and supplies, net                                                                                                                                                                        |       | 1,384               |       | 1,346                       |       |
| Prepaid expenses                                                                                                                                                                                                    |       | 280                 |       | 194                         |       |
| Total current  assets                                                                                                                                                                                               |       | 25,547              |       | 8,763                       |       |
| Property and  equipment, net                                                                                                                                                                                        |       | 7,383               |       | 6,024                       |       |
| Oil and gas  properties accounted for under the successful efforts method of accounting:                                                                                                                            |       |                |       |                        |       |
| Proved  properties, net                                                                                                                                                                                             |       | 852                 |       | 314                         |       |
| Unproved  leaseholds                                                                                                                                                                                                |       | 299                 |       | 136                         |       |
| Wells-in-progress                                                                                                                                                                                                   |       | 1,742               |       | 1,081                       |       |
| Total oil and  gas properties                                                                                                                                                                                       |       | 2,893               |       | 1,531                       |       |
| Other  non-current assets:                                                                                                                                                                                          |       |                |       |                        |       |
| Deferred debt  issuance costs, net                                                                                                                                                                                  |       | 1,079               |       | —                      |       |
| Other  non-current assets                                                                                                                                                                                           |       | 1,115               |       | 1,122                       |       |
| Total other  non-current assets                                                                                                                                                                                     |       | 2,194               |       | 1,122                       |       |
| Total assets                                                                                                                                                                                                        |       | $                   | 38,017     |                        | $          | 17,440 |   |
| ** **                                                                                                                                                                                                          | ** ** | ** **          | ** ** | ** **                  | ** ** |
| **Liabilities and Stockholders’ Equity**                                                                                                                                                                       | ** ** | ** **          | ** ** | ** **                  | ** ** |
| Current  liabilities:                                                                                                                                                                                               |       |                |       |                        |       |
| Accounts payable                                                                                                                                                                                                    |       | $                   | 1,123      |                        | $          | 1,652 |   |
| Accrued expenses  and other current liabilities                                                                                                                                                                     |       | 267                 |       | 107                         |       |
| Total current  liabilities                                                                                                                                                                                          |       | 1,390               |       | 1,759                       |       |
| Subordinated  convertible notes and other debt, less current portion                                                                                                                                                |       | 21,980              |       | 17                          |       |
| Other  non-current liabilities                                                                                                                                                                                      |       | 513                 |       | 407                         |       |
| Total  liabilities                                                                                                                                                                                                  |       | 23,883              |       | 2,183                       |       |
| Commitments and  Contingencies                                                                                                                                                                                      |       |                |       |                        |       |
| Stockholders’  equity:                                                                                                                                                                                         |       |                |       |                        |       |
| Capital,  50,000,000 shares authorized, par value $0.001, 5,639,000 shares  undesignated; Series C Convertible Preferred, 4,361,000 shares  authorized; 10,000 and 40,000 issued and outstanding, respectively |       |                | *          |                        | *          |
| Common stock,  40,000,000 shares authorized; 8,261,894 issued; 7,461,894 and 7,431,894  outstanding, respectively                                                                                                   |       | 8                   |       | 8                           |       |
| Treasury stock                                                                                                                                                                                                      |       | (800                | )          | (800                        | )          |
| Additional  paid-in-capital                                                                                                                                                                                         |       | 21,696              |       | 21,325                      |       |
| Accumulated  deficit                                                                                                                                                                                                |       | (6,770              | )          | (5,276                      | )          |
| Total  stockholders’ equity                                                                                                                                                                                    |       | 14,134              |       | 15,257                      |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                                    |       | $                   | 38,017     |                        | $          | 17,440 |   |

 

----

****                   *amounts less than one thousand

 

The accompanying notesare an integral part of these condensed consolidated financial statements.

 

1

----

 

**PRB Gas Transportation, Inc.**

**CondensedConsolidated Statements of Operations**

**(Inthousands, except share amounts)**

**(Unaudited)**

 
| ** **                                             | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                             | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| ** **                                             | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Revenue:                                               |       |                             |       |   |   |
| Gas gathering  revenue                                 |       | $                                | 675        |   | $ | 841 |   |
| Management fee  revenue                                |       | 94                               |       | — |   |
| Natural gas  revenue                                   |       | 58                               |       | — |   |
| Total revenue                                          |       | 827                              |       | 841 |   |
| Operating  expenses:                                   |       |                             |       |   |   |
| Gas gathering  expense                                 |       | 588                              |       | 491 |   |
| Gas production  costs                                  |       | 78                               |       | — |   |
| Exploration  expense                                   |       | 97                               |       | — |   |
| Depreciation,  depletion, amortization and accretion   |       | 320                              |       | 277 |   |
| General and  administrative expense                    |       | 1,017                            |       | 262 |   |
| Total operating  expenses                              |       | 2,100                            |       | 1,030 |   |
| Operating loss                                         |       | (1,273                           | )          | (189 | ) |
| Other income  (expense):                               |       |                             |       |   |   |
| Interest and  other income                             |       | 187                              |       | 1 |   |
| Interest expense                                       |       | (408                             | )          | (42 | ) |
| Total other  expense                                   |       | (221                             | )          | (41 | ) |
| Net loss                                               |       | (1,494                           | )          | (230 | ) |
| Convertible preferred  stock dividends                 |       | —                           |       | (182 | ) |
| Net loss  applicable to common stockholders            |       | $                                | (1,494     | ) | $ | (412 | ) |
|                                                   |       |                             |       |   |   |
| Net loss per  share – basic and diluted           |       | $                                | (0.20      | ) | $ | (0.52 | ) |
|                                                   |       |                             |       |   |   |
| Basic and  diluted weighted average shares outstanding |       | 7,432,561                        |       | 800,000 |   |

 

The accompanyingnotes are an integral part of these condensed consolidated financialstatements.

 

2

----

 

**PRB GasTransportation, Inc.****Condensed Consolidated Statements of CashFlows**

**(Inthousands)**

**(Unaudited)**

 
| ** **                                                                                 | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                 | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| ** **                                                                                 | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Cash flows from  operating activities:                                                     |       |                             |       |   |   |
| Net loss                                                                                   |       | $                                | (1,494     | ) | $ | (230 | ) |
| Adjustments to  reconcile net loss to net cash (used in) provided by operating activities: |       |                             |       |   |   |
| Exploration expense                                                                        |       | 97                               |       | — |   |
| Depreciation,  depletion, amortization and accretion                                       |       | 320                              |       | 277 |   |
| Amortization of  debt issuance costs                                                       |       | 64                               |       | — |   |
| Share-based  compensation expense                                                          |       | 279                              |       | — |   |
| Changes in  assets and liabilities:                                                        |       |                             |       |   |   |
| Accounts  receivable                                                                       |       | (446                             | )          | (133 | ) |
| Inventory, net                                                                             |       | (38                              | )          | — |   |
| Prepaid expenses                                                                           |       | (86                              | )          | (49 | ) |
| Other  non-current assets                                                                  |       | 13                               |       | 3 |   |
| Accounts payable                                                                           |       | (529                             | )          | 185 |   |
| Accrued expenses  and other current liabilities                                            |       | 160                              |       | 89 |   |
| Other  non-current liabilities                                                             |       | 12                               |       | — |   |
| Net cash (used  in) provided by operating activities                                       |       | (1,648                           | )          | 142 |   |
| Cash flows from  investing activities:                                                     |       |                             |       |   |   |
| Capital  expenditures                                                                      |       | (2,848                           | )          | (85 | ) |
| Deferred  acquisition costs                                                                |       | (19                              | )          | (3 | ) |
| Unproved  leaseholds acquisitions                                                          |       | (183                             | )          | — |   |
| Net cash used in  investing activities                                                     |       | (3,050                           | )          | (88 | ) |
| Cash flows from  financing activities:                                                     |       |                             |       |   |   |
| Proceeds from  convertible notes                                                           |       | 21,965                           |       | — |   |
| Issuance costs  of raising capital                                                         |       | —                           |       | (90 | ) |
| Issuance costs  related to convertible notes                                               |       | (1,051                           | )          | — |   |
| Convertible  preferred stock dividends                                                     |       | —                           |       | (183 | ) |
| Repayment of  term loan                                                                    |       | (2                               | )          | — |   |
| Net cash  provided by (used in) financing activities                                       |       | 20,912                           |       | (273 | ) |
| Net increase  (decrease) in cash                                                           |       | 16,214                           |       | (219 | ) |
| Cash—beginning  of period                                                             |       | 6,434                            |       | 320 |   |
| Cash—end of  period                                                                   |       | $                                | 22,648     |   | $ | 101 |   |
|                                                                                       |       |                             |       |   |   |
| Supplemental disclosure  of cash flow activity                                             |       |                             |       |   |   |
| Cash paid in  interest                                                                     |       | $                                | 246        |   | $ | 41 |   |
| Supplemental  schedule for non-cash activity                                               |       |                             |       |   |   |
| Issuance of  warrants to a related party in connection with convertible notes              |       | $                                | 92         |   | — |   |
| Asset retirement  obligations                                                              |       | $                                | 85         |   | — |   |

 

The accompanying notesare an integral part of these condensed consolidated financial statements.

 

3

----

 

**PRB GASTRANSPORTATION, INC.Notes to Condensed Consolidated Financial StatementsMarch 31, 2006**

**(Unaudited)**

 

**Note 1—Description ofBusiness, Basis of Presentation and Summary of Significant Accounting Policies**

 

***Descriptionof Business***

 

***PRB is an independent energy companyengaged in the acquisition, exploration, development and production of naturalgas. In addition, we provide gas gathering, processing and compression servicesfor properties we operate and for third party producers. We also providemanagement services by operating certain properties by providing technical andadministrative support for those properties. PRB was formed in December 2003,and is incorporated in the State of Nevada. On April 12, 2005, our commonshares began trading on the American Stock Exchange under the ticker symbol “PRB.”Since our inception, PRB has conducted its activities in the Rocky Mountain states.***

 

***Basisof Presentation***

 

We have prepared thisQuarterly Report on Form 10-Q under the rules and regulations of theUnited States Securities and Exchange Commission (“SEC”). Because this is aninterim period filing presented using a condensed format, certain informationand footnote disclosures normally included in consolidated financial statementsprepared in accordance with accounting principles generally accepted in theUnited States of America have been condensed or omitted. These interimfinancial statements should be read in conjunction with the auditedconsolidated financial statements and the summary of significant accountingpolicies and notes thereto included in our 2005 Annual Report on Form 10-K.During interim periods, we follow the same accounting policies outlined in our2005 Annual Report on Form 10-K, Note 2 – Summary of Significant AccountingPolicies. The condensed consolidated financial statements as ofMarch 31, 2006, and for the three months ended March 31, 2006and 2005, are unaudited. We derived the condensed consolidated balance sheet asof December 31, 2005, from the audited balance sheet filed in our 2005Annual Report on Form 10-K. Certain reclassifications have been made tothe 2005 unaudited condensed consolidated financial statements to conform tothe 2006 presentation. In the opinion of management, these interim financialstatements contain all adjustments which are of a normal, recurring nature tofairly present the financial position of PRB as of March 31, 2006 and theresults of our operations and cash flows for the three months ended March 31,2006 and 2005. Information for interim periods may not be indicative of ourresults of operations for the entire year.

 

***Summary ofSignificant 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 examplesof such estimates are, the realizability of inventory, the appropriate levelsof various accruals including asset retirement obligations, determining theremaining economic lives and carrying values of property and equipment, oil andgas properties and other long-lived assets.) In addition, we use assumptions toestimate the fair value of share-based compensation. See Share-BasedCompensation below and Note 5 - EquityCompensation Plan.**We believe ourestimates and assumptions are reasonable; however, actual results maydiffer from our estimates.

 

*Share-BasedCompensation*

 

Prior to our January 1,2006, adoption of Financial Accounting Standards Board (“FASB”) Statement No.123(R), “*Share-Based Payment*” (“SFAS No. 123(R)”),we accounted for share-based compensation using the intrinsic value methodprescribed in Accounting Principles Board Opinion No. 25, “*Accountingfor Stock Issued to Employees*” (“APB No. 25”) and relatedinterpretations.  Accordingly, because the stock option grant price wasequal to or greater than the respective market prices of our common stock onthe grant dates, no compensation expense was recognized for Company-issuedstock options.  In accordance with Statement of Financial Accounting Standards(“SFAS”) No. 123, “*Accounting for Stock-basedCompensation*” (“SFAS No. 123”) and SFAS No. 148, *“Accounting for Stock-Based Compensation – Transitionand Disclosure,”*we provided pro-forma net loss and net loss pershare disclosures for each period prior to the adoption of SFAS No. 123(R) asif we had applied the fair value-based method in measuring compensation expensefor our share-based compensation plans.

 

4

----

 

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

 

***Net Loss Per Share***

 

We account for earnings(loss) per share (“EPS”) in accordance with SFAS No. 128, “*Earnings per Share*” (“SFAS No. 128”). Under SFAS No.128, basic EPS is computed by dividing the net loss applicable to commonstockholders by the weighted average common shares outstanding withoutincluding any potentially dilutive securities. 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.

 

*Potentiallydilutive securities, which have been excluded from the determination of dilutedEPS because their effect would be anti-dilutive, are as follows:*

 
| ** **                                 | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------|------------|----------------------------------------|------------|
| ** **                                 | ** ** | **2006**                               | ** ** | **2005** | ** ** |
|                                       |       |                                   |       |   |   |
| Series A Convertible Preferred        |       | —                                 |       | 2,400,000 |   |
| Series B Convertible Preferred        |       | —                                 |       | 1,550,000 |   |
| Series C Convertible Preferred        |       | 10,000                                 |       | 411,000 |   |
| Warrants                                   |       | 270,000                                |       | 45,000 |   |
| Options                                    |       | 680,750                                |       | 220,000 |   |
| Convertible notes                          |       | 3,137,857                              |       | — |   |
| Total potentially dilutive shares excluded |       | 4,098,607                              |       | 4,626,000 |   |

 

***Concentrations of Credit Risk***

 

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

 

Revenues from customerswhich represented 10% or more of our sales for the three months ended March 31,2006 and 2005 were as follows:

 
| ** **                                | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|
| **Customer**                              | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| ** **                                | ** ** | **(% of total revenue)**         | ** ** |
|                                      |       |                             |       |   |   |
| A – Gathering and processing segment |       | 42                               | %          | 61 | % |
| B – Gathering and processing segment |       | 13                               | %          | — |   |
| C – Corporate                        |       | 11                               | %          | — |   |

 

5

----

 

***Debt Issuance Costs***

 

***We include debt issuance costs in othernon-current assets. These costs are associated with the senior subordinatedconvertible notes (“Notes”) we issued in March 2006. The remaining unamortizeddebt issuance costs at March 31, 2006, was $1.079 million and are beingamortized using the effective interest method over the life of the Notes.***

*** ***

**Note 2—Acquisitions andSignificant Contracts**

** **

***Acquisitions***

*** ***

OnJanuary 1, 2006, we purchased a gas gathering system from Storm Cat EnergyCorporation (“Storm Cat”) for $1.0 million. We also entered into a relatedgas gathering and compression services agreement with Storm Cat covering 6,600acres in the Recluse area of Wyoming.

 

OnJanuary 11, 2006, we agreed to gather gas for the Termo Company (“Termo”)and as part of this understanding we paid $83 thousand for a 9.27% workinginterest in the development of approximately 3,400 existing net acres in theRecluse area of Wyoming and an interest in any future lease acquisitions in oraround the existing leases. In addition, Termo designated us as their preferredgatherer for their Homestead Project in the Recluse area.

 

OnFebruary 1, 2006, we acquired a 15% working interest in leaseholds underlying theGAP gas gathering system and we plan to propose a drilling program on theseproperties during 2006. The leaseholds cover 5 townships and a total ofapproximately 2,200 net acres. We paid $100 thousand for the assignments inthese leaseholds and in addition received two Promissory Notes totaling $100thousand. These notes bear interest at 7% per annum. Principal and interest isto be paid from the oil and gas revenues generated from the leaseholds. Anyunpaid principal and accrued interest is due on or before December 31, 2008. Werecorded the estimated fair value of the notes receivable at $20 thousand, andrecorded the estimated fair value of the undeveloped leasehold interest at $80thousand, and have included the transaction in unproved leaseholds acquisitionsin our Statements of Cash Flows.

 

OnMarch 1, 2006, we acquired a high pressure natural gas gathering line fromClear Creek Natural Gas, LLC and paid $453 thousand, including sales tax of $3thousand. The newly acquired 6.5 miles of 6 and 8-inch steel pipe ties into thegathering and compression assets we purchased in January 2006 from StormCat. We will deliver gas from this line to the Thunder Creek interstatepipeline system.

 

***Significant Contracts***

 

***Storm Cat Agreement***

*** ***

In January 2006, we entered into a 10-year gasgathering services agreement with Storm Cat which requires Storm Cat to pay usgas gathering fees on specific minimum volumes of gas whether those volumes aredelivered and transported through our system or not (the “Take or Pay Agreement”).The Take or Pay Agreement is effective January 1, 2006, has a 10 year term ofwhich the first five years are noncancelable. The Take or Pay Agreementrequires Storm Cat to pay us a minimum of $972 thousand in 2006 and a minimumof $3.103 million in gas gathering fees during the first three years of theagreement. Gas gathering fees in excess of the minimum annual requirements inthe first two years can be carried over into the next year to satisfy that year’sminimum annual requirement.

 

During the three monthsended March 31, 2006, we billed Storm Cat $112 thousand in gas gathering feesfor actual volumes delivered. The Take or Pay Agreement allows for quarterlyadjustments when estimates indicate that annual minimum commitment requirementswill not be met. We elected to not pursue an adjustment for estimated shortfallsapplicable to the three months ended March 31, 2006, and we will monitor thisestimated shortfall during future periods.

 

The Storm Cat Take or PayAgreement also provides for our gas gathering rates to decrease during thefourth and fifth years of the agreement. We recognize revenues based on ourestimate of the average gas gathering rate during the noncancelable term of theagreement. Accordingly, we deferred $12 thousand of gas gathering fees asdeferred revenue on our condensed consolidated balance sheet at March 31, 2006.

 

6

----

 

***Rocky Mountain Gas Agreement***

 

In March 2006, weelected to terminate our Farm-In and Development Agreement and ManagementServices Agreement with Enterra Energy Trust and its wholly-owned subsidiaryRocky Mountain Gas (“Rocky Mountain Gas”). We agreed to continue to operateRocky Mountain Gas’ properties and provide management services for at least 60days from the termination date. PRB also agreed to drill certain wells that hadbeen previously approved by the State of Wyoming and Rocky Mountain Gas. Weplan to operate these wells as provided by the terms of the Operating Agreementbetween PRB and Rocky Mountain Gas. As a result of the termination of theagreements, our working interest was reduced to 10% for all projects initiatedafter the termination date. Nine exploratory wells were initiated after thetermination date through March 31, 2006. Accordingly, we have reclassified 90%of the costs incurred on those wells to accounts receivable, as these costs arebeing billed to Rocky Mountain Gas. These costs totaled $713 thousand and wereoutstanding as of March 31, 2006.

 

**Note 3—Asset RetirementObligations**

 

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

 

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

 

A reconciliation of ourasset retirement obligation liability for the three months ended March 31, 2006and 2005, is as follows:

 
| ** **                             | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------|------------|------------------------|------------|
| ** **                             | ** ** | **March 31, 2006**     | ** ** | **March 31, 2005** | ** ** |
| ** **                             | ** ** | **(In thousands)**     | ** ** |
|                                   |       |                   |       |   |   |
| Asset retirement obligation January 1, |       | $                      | 387        |   | $ | 65 |   |
| Acquisition of Recluse system          |       | 69                     |       | — |   |
| Proved properties                      |       | 16                     |       | — |   |
| Accretion                              |       | 9                      |       | 1 |   |
| Ending asset retirement obligation     |       | 481                    |       | $ | 66 |   |
|                                        |            |                        |            |  |  |  |  |

 

**Note 4—Borrowings**

 

As ofMarch 31, 2006 and December 31, 2005, our borrowings consisted of thefollowing:

 
| ** **                            | ** ** | **March 31, 2006** | ** ** | **December 31, 2005** | ** ** |
|---------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                            | ** ** | **(In thousands)** | ** ** |
|                                  |       |               |       |                  |       |
| Senior subordinated convertible notes |       | $                  | 21,965     |                  | $          | — |   |
| Other term loans                      |       | 25                 |       | 27                    |       |
|                                  |       | 21,990             |       | 27                    |       |
| Less current portion                  |       | (10                | )          | (10                   | )          |
| Total long-term borrowings            |       | $                  | 21,980     |                  | $          | 17 |   |

 

Ourborrowings at March 31, 2006,  had thefollowing maturities:

 
| ** **       | ** ** | **(In thousands)** | ** ** |
|------------------|------------|--------------------|------------|
|             |       |               |       |
| 2006 (remaining) |       | $                  | 8          |   |
| 2007             |       | 10                 |       |
| 2008             |       | 21,972             |       |
| Total            |       | $                  | 21,990     |   |

 

7

----

 

***Senior Subordinated Convertible Notes***

 

Duringthe three months ended March 31, 2006, we issued a total of $21.965 million in Notesthrough a private placement under Rule 144A of the Securities Act of 1933(“1933 Act”). The Notes are secured by certain gas gathering assets owned byPRB and mature 30 months from the date of issue. The Notes bear interest at afixed rate of 10% per annum, payable quarterly in arrears beginning onMarch 15, 2006.

 

Debtissuance costs in the amount of $1.051 million, excluding the value of warrantsissued,  were deferred as othernon-current assets and are being amortized as interest expense using theeffective interest method over the 30-month life of each note. For the threemonths ended March 31, 2006, we incurred $408 thousand in total interestexpense applicable to these Notes.

 

OnMarch 8, 2006, we closed the offering. We plan to file a registration statementapplicable to the shares of common stock underlying the Notes. The Notesinclude a Registration Rights Agreement that provides for liquidated damages inthe amount of 1% per month in the event that our registration statement is notdeclared effective by the 120th day after the Closing date.

 

 Note holders have the right, after the shareshave been registered, to convert the Notes to common shares at a conversionprice of $7.00 per share, which conversion price is subject to certainanti-dilution adjustments. In the event that our common stock trades at $14.00per share or above for 10 consecutive days, we have a call provision whichallows us to retire the Notes upon 10 days prior written notice by paying incash, the principal amount and any accrued but unpaid interest.

 

Wefollow SFAS No. 133, and EITF 00-19, “*Accounting for Derivative Financial Instruments Index to, andPotentially Settled in, a Company’s Own Stock*” and relatedpronouncements. We have evaluated the conversion feature embedded in our seniorsubordinated convertible debt and the liquidated damages provision in therelated Registration Rights Agreement and we have determined that the entireamount of these securities are properly classified as long-term debt and arenot accounted for as derivatives on our condensed consolidated balance sheet atMarch 31, 2006.

 

 In addition, we are prohibited from declaringor paying cash dividends on our common stock during the period that any note isoutstanding and unpaid.

 

**Note5—Equity Compensation Plan**

 

Wehave an Equity Compensation Plan (“Option Plan”). The Option Plan grantsoptions to purchase shares of our common stock to eligible employees,contractors and non-employee members of the Board of Directors. In accordancewith our Option Plan, we reserve shares equal to 10% of our issued and outstandingcommon stock for issuance under the Option Plan. Our compensation committee maygrant options on such terms, including vesting and payment forms, as it deemsappropriate in its discretion, however, no option may be exercised more than 10years after its grant, and the purchase price may not be less than 100% of thefair market value of our common stock on the date of grant.

 

Alloptions granted to date under the Option Plan have been granted at exerciseprices equal to or greater than the respective market prices of our commonstock on the grant dates. There were 65,439 shares available for grant underthe Option Plan as of March 31, 2006.

 

Thefollowing table summarizes activity for options:

 
| ** **                | ** ** | **Three Months Ended  March 31, 2006** | ** ** | **Three Months Ended  March 31, 2005** | ** ** |
|---------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                | ** ** | **Number of  Share****s**                   | ** ** | **Weighted Avg.  Exercise Price**      | ** ** | **Number of  Share****s** | ** ** | **Weighted Avg.  Exercise Price** | ** ** |
|                      |       |                                             |       |                                             |       |   |   |   |   |
| Outstanding at January 1, |       | 463,250                                          |       | $                                                | 6.74       |   | 220,000 |   | $ | 5.50 |   |
| Granted                   |       | 239,750                                          |       | 6.51                                             |       | — |   | — |   |
| Forfeited                 |       | 22,250                                           |       | 8.57                                             |       | — |   | — |   |
| Exercised                 |       | —                                           |       | —                                           |       | — |   | — |   |
| Outstanding at March 31,  |       | 680,750                                          |       | $                                                | 6.60       |   | 220,000 |   | $ | 5.50 |   |
|                      |       |                                             |       |                                             |       |   |   |   |   |   |   |
| Exercisable at March 31,  |       | 297,500                                          |       | $                                                | 6.53       |   | 70,000 |   | $ | 5.50 |   |

 

8

----

 

The fair value of eachoption granted is estimated on the date of grant using the Black-Scholes optionpricing model. The weighted average fair value of options granted during the threemonths ended March 31, 2006 was $3.84. The weighted average remainingcontractual life for the options outstanding at March 31, 2006 is 7.75 years.

 

TheBlack-Scholes option valuation model was developed for use in estimating thefair value of traded options that have no vesting restrictions and are fullytransferable. In addition, option valuation models incorporate highlysubjective assumptions including the expected stock price volatility. Our stockoptions 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.

 

***Adoptionof SFAS No. 123(R)***

 

***PRB adopted SFAS No. 123(R) onJanuary 1, 2006 using the modified prospective transition method asdescribed in SFAS No. 123(R). Under this method, compensation expense isrecognized for all share-based payments granted after the effective date andfor all unvested awards granted prior to the effective date, over the vestingperiod. In accordance with SFAS No. 123(R), prior period amounts were notrestated. During the three months ended March 31, 2006, we recorded share-basedcompensation expense of $279 thousand, which was recognized in general andadministrative expense with a corresponding credit to additional paid-in-capital.Of the $279 thousand, $57 thousand was related to unvested options grantedprior to January 1, 2006. Compensation expense related to unvested optionsgranted not yet recognized as of March 31, 2006, was $850 thousand. We expectto recognize this compensation expense over the vesting period. The weighted-averagevesting period is 3.25 years.***

*** ***

Prior to the effectivedate, our option plan transactions were accounted for under APB No. 25 andrelated interpretations. Pro-forma information regarding the impact of total share-basedcompensation on net loss and net loss per share for prior periods is requiredby SFAS No. 123. Such pro-forma information, determined as if we hadaccounted for our employee stock options under the fair value method during thethree months ended March 31, 2005, is illustrated in the following table:

 

 
| ** **                                                                                                                                  | ** ** | **Three Months  Ended**                       | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                                                  | ** ** | **March 31, 2005**                            | ** ** |
| ** **                                                                                                                                  | ** ** | **(In thousands,  except per share amounts)** | ** ** |
| Net loss applicable to common stockholders:                                                                                                 |       |                                          |       |
| As reported                                                                                                                                 |       | $                                             | (412       | ) |
| Less: Total  share-based employee compensation expense determined under fair value-based  method for all awards, net of related tax effects |       | 23                                            |       |
| Pro-forma net loss                                                                                                                          |       | $                                             | (435       | ) |
|                                                                                                                                        |       |                                          |       |
| Net loss per share, basic and diluted:                                                                                                      |       |                                          |       |
| As reported                                                                                                                                 |       | $                                             | (0.52      | ) |
|                                                                                                                                        |       |                                          |       |
| Pro-forma                                                                                                                                   |       | $                                             | (0.54      | ) |

 

*DeterminingFair Value*

 

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

 

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

 

*ExpectedVolatility*. Consistent with SFAS No. 123(R)******we base our expectations about thefuture volatility of our stock 

 

9

----

 

using the weighted average volatilities of similar companies that operatein our industry, taking into consideration stage of life cycle and size.

 

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

 

*Dividends.*We have never paid any cash dividends on our common stock andwe do not anticipate paying any cash dividends in the foreseeable future.Consequently, we use an expected dividend yield of zero in the Black-Scholesoption valuation model.

 

*Forfeitures.*SFAS No. 123(R)******requiresus to estimate forfeitures at the time of grant and revise those estimates insubsequent periods if actual forfeitures differ from those estimates. We usehistorical data to estimate pre-vesting option forfeitures and recordshare-based compensation expense only for those awards that are expected tovest. For purposes of calculating pro-forma information under SFAS No. 123, weaccounted for forfeitures as they occurred.

 

We used the followingassumptions to estimate the fair value of options granted for the three monthsended March 31, 2006 and 2005:

 
| ** **                       | ** ** | **SFAS No. 123(R) Expense** | ** ** | **SFAS No. 123 Pro-Forma** | ** ** |
|----------------------------------|------------|-----------------------------|------------|----------------------------|------------|
| ** **                       | ** ** | **Three Months Ended**      | ** ** | **Three Months Ended**     | ** ** |
| ** **                       | ** ** | **March 31, 2006**          | ** ** | **March 31, 2005**         | ** ** |
|                             |       |                        |       |                       |       |
| Expected life of options         |       | 2.5 – 6.25 years       |       | 5 – 10 years          |       |
| Expected volatility              |       | 80%                         |       | 25%                        |       |
| Risk-free interest rate          |       | 4.31– 4.69%            |       | 3.89 – 4.73%          |       |
| Expected dividend yield of stock |       | 0%                          |       | 0%                         |       |

 

**Note 6—SegmentInformation**

 

SFAS No. 131, “*Disclosuresabout Segments of an Enterprise and Related Information*”**(“SFAS No.131”) establishesstandards for the way in which public companies disclose certain informationabout operating segments in their financial reports. Consistent with SFAS No.131, we have defined two reportable segments, described below, based on factorssuch as how we manage operations and how the chief operating decision makerviews results. We consider our chief executive officer as our chief operatingdecision maker. During the third quarter of 2005, we entered into the oil andgas exploration and production segment and began producing and selling naturalgas during the fourth quarter of 2005.

 

***GasGathering and Processing Segment***

 

We own and operate gasgathering and processing systems we acquired in 2004 and during the threemonths ended March 31, 2006, as earlier described. We charge a fee to ourcustomers for these services based on volumes of gas transported, and/or basedon a monthly minimum fee and/or based on the level of compression servicesprovided.

 

InMarch 2006, we notified our customers served by the TOP system that we wereraising our rates to cover cash costs plus 15% for a two month period. Thesecustomers have agreed to the increase. We also advised these customers that wewere planning to shut down the TOP system after the two month period haselapsed. We plan to dismantle the TOP site at that time and plan to sell theequipment not required for our other activities. During the twelve months endedDecember 31, 2005, we recorded an estimated impairment of $2.487 millionfor the TOP system. We reviewed the carrying value of our TOP system as ofMarch 31, 2006. We expect that the future cash flows that we will receive fromshutting-down the system and or selling the system or its component parts willexceed the carrying value. Accordingly, no further impairment has been recorded.

 

***Oiland Gas Exploration and Production Segment***

*** ***

Beginning in the thirdquarter of 2005, we commenced operations in the exploration and productionsegment. Our operations in this segment include exploring for, developing,producing and marketing natural gas from coal-bed methane wells. For the threemonths ended March 31, 2006, our exploration and production segmentoperated in the Powder River Basin area of Wyoming.

 

10

----

 

Throughour Management Services Agreement with Rocky Mountain Gas, we earn managementfee revenue and we have included that revenue under Corporate in the following tablethat details the performance of our segments. In March 2006, we elected toterminate the Management Services Agreement. As a result of the termination, weexpect to incur approximately $150 thousand of general and administrativeexpenses during the year ended December 31, 2006, that we will not be able tobill out as management fees. See Note 2 – Acquisitions and Significantcontracts for details regarding our Rocky Mountain Gas agreements.

 
| ** **                                   | ** ** | **Three Months Ended March 31, 2006** | ** ** |
|----------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                   | ** ** | **Gathering  and  Processing**                       | ** ** | **Exploration  and  Production** | ** ** | **Corporate** | ** ** | **Total** | ** ** |
| ** **                                   | ** ** | **(In thousands)**                              | ** ** |
| ** **                                   | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                                      |       | $                                                    | 675        |   | $ | 58 |   | $ | 94 |   | $ | 827 |   |
|                                         |       |                                                 |       |   |   |   |   |   |   |
| Net loss attributable to common stockholders |       | $                                                    | (203       | ) | $ | (134 | ) | $ | (1,157 | ) | $ | (1,494 | ) |
|                                         |       |                                                 |       |   |   |   |   |   |   |
| Identifiable assets:                         |       |                                                 |       |   |   |   |   |   |   |
| Property and equipment, net                  |       | $                                                    | 7,180      |   | — |   | $ | 203 |   | $ | 7,383 |   |
| Oil and gas properties, net                  |       | —                                               |       | $ | 2,893 |   | — |   | $ | 2,893 |   |
| Contracts, net                               |       | $                                                    | 1,066      |   | — |   | — |   | $ | 1,066 |   |

 

Weoperated in only one segment during the three months ended March 31, 2005and our management reviewed the results of our operations as a single segmentduring that period. Accordingly, segment information is not presented for the threemonths ended March 31, 2005.

 

**Note7— Contingencies**

 

***PossibleRescission of Series C Convertible Preferred Stock Sale***

 

In December 2004,we received $1.233 million from the sale of 411,000 shares ofSeries C Convertible Preferred stock. We paid no cash or other commissionsor finders’ fees in connection with this offering. In the view of the SEC, thisplacement might not have been eligible for an exemption from registration underthe 1933 Act. In the absence of such an exemption, investors could bring suitagainst us to rescind their stock purchases, in which event we could be liablefor rescission payments to these investors of up to $1.233 millionexclusive of interest and costs. In August 2005, we filed a registrationstatement on Form S-1 to register the underlying shares of common stockissuable upon conversion of the Series C Convertible Preferred stock. TheSEC declared the S-1 effective on August 16, 2005. As of March 31,2006, 401,000 Series C Convertible Preferred shares had been converted tocommon shares and 10,000 shares remained outstanding. See Note 9 –Subsequent Events for discussions of subsequent conversions.

 

**Note8—Related Party Transactions**

 

Susan Wright, ourCorporate Secretary and wife of the CEO, provides Corporate Secretary servicesto us on a contract basis. During the three months ended March 31, 2006and 2005, Mrs. Wright was paid $12 thousand and $3 thousand, respectively,for contract services.

 

InJanuary 2006, we issued 40,000 warrants to John McGrain, a former Director,for services rendered in respect to our recent convertible debt offering. Thesewarrants immediately vested with an exercise price of $7.00 per share. Theestimated fair value of the warrants was $92 thousand at issuance based on theBlack-Scholes model, with the following assumptions: a) contractual life of twoyears; b) expected volatility of 80%; c) risk-free rate of 4.82% and d)expected dividend yield of zero percent. We recorded the fair value of thewarrants as deferred debt issuance costs, with a corresponding increase inadditional paid-in-capital.

 

One of our Officers (andDirector) and one of our Directors purchased $100 thousand and $200 thousand,respectively, of the Notes, that were issued during the three months endedMarch 31, 2006. We paid interest on March 15, 2006 of $444 and $888, to ourOfficer (and Director) and our Director, respectively in respect to these Notes.In addition, a former Director, Mr. John McGrain, purchased $1 million ofthe Notes issued, and we paid interest of $4,444 to Mr. McGrain.

 

11

----

 

**Note9 —Subsequent Events**

 

InApril 2006, the remaining 10,000 shares of Series C Convertible Preferredstock were converted to common shares.

 

OnMay 12, 2006, PRB signed a definitive Purchase and Sale Agreement to purchaseapproximately 70 miles of gathering lines located in the Recluse area ofWyoming’s Powder River Basin. PRB, subject to due diligence that will includepipeline integrity testing and environmental review, plans to complete thistransaction by the end of June 2006. Also included is a gas gathering agreementin respect to one producer.

 

12

----

 

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

 

Unlessthe context requires otherwise, the terms “PRB,” “us,” “we” and “our” refer toPRB Gas Transportation, Inc. and its subsidiary.

 

**Statement of Forward Looking Statements**

 

Thisquarterly report on Form 10-Q contains forward-looking statements within themeaning of Section 27A of the Securities Act of 1933, as amended, andSection 21E of the Securities Exchange Act of 1934, as amended. Thesestatements identify prospective information. Important factors could causeactual results to differ, possibly materially, from those in theforward-looking statements. In some cases you can identify forward-lookingstatements by words such as “anticipate,” “believe,” “could,” “estimate,” “expect,”“plan,” “intend,” “may,” “should,” “will” and “would” or other similar words.You should read statements that contain 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 is important to communicate our futureexpectations to our investors. There may, however, be events in the future thatwe are not able to accurately predict or control. These forward-lookingstatements are subject to a number of risks, uncertainties and assumptions.

 

Weundertake no obligation to update publicly or revise any forward-lookingstatements. You should not rely upon forward-looking statements as predictionsof future events or performance. We cannot assure you that the events andcircumstances reflected in the forward-looking statements will be achieved oroccur. Although we believe that the expectations reflected in theforward-looking statements are reasonable, we cannot guarantee future results,levels of activity, performance or achievements.

 

Youshould read the following discussion in conjunction with the financialstatements and related notes in Item I and our Annual Report on Form 10-K forthe year ended December 31, 2005.

 

**GeneralOverview**

 

PRB is an independentenergy company engaged in the acquisition, exploration, development andproduction of natural gas. In addition, we provide gas gathering, processingand compression services for properties we operate and for third partyproducers. PRB was formed in December 2003, and is incorporated in the State ofNevada. On April 12, 2005, our common shares began trading on the AmericanStock Exchange under the ticker symbol “PRB.” Since our inception, PRB hasconducted its activities in the Rocky Mountain states.

 

***First Quarter 2006 Operational and Financial Highlights***

 

Duringthe first quarter of 2006, we raised $21.965 million in cash, before expenses,by issuing senior subordinated convertible notes. We intend to use these fundsfor our exploration, development, and asset acquisition programs.

 

Duringthe first quarter of 2006, we acquired two gas gathering systems in the Reclusearea of Wyoming (together our “Recluse” gas gathering system) for $1.453million.

 

InJanuary 2006, we agreed to gather gas for the Termo Company (“Termo”) and aspart of this understanding we paid $83 thousand for a 9.27% working interest inthe development of approximately 3,400 existing net acres in the Recluse areaof Wyoming and an interest in any future lease acquisitions in or around theexisting leases. In addition, Termo designated us as the preferred gatherer fortheir Homestead project in the Recluse area. There are approximately 30,000undedicated acres in the Recluse area that offer us the opportunity to expandboth our exploration and production and gas gathering and processingactivities.

 

InFebruary 2006, we acquired a 15% working interest in leaseholds underlying theGAP gas gathering system and we plan to propose a drilling program on theseproperties during 2006. The leaseholds cover 5 townships and a total ofapproximately 2,200 net acres. We paid $100 thousand for the assignments inthese leaseholds and in addition received two Promissory Notes totaling $100thousand. These notes bear interest at 7% per annum. Principal and interest isto be paid from the oil and gas revenues generated from the leaseholds. Anyunpaid principal and accrued interest is due on or before December 31, 2008. Werecorded the estimated fair value of the notes receivable at $20 thousand, andrecorded the estimated fair value of the undeveloped leasehold interest at $80thousand, and have included the transaction in unproved leaseholds acquisitionsin our Statements of Cash Flows.

 

13

----

 

InMarch 2006, we elected to terminate our Farm-In and Development Agreementand Management Services Agreement with Enterra Energy Trust and itswholly-owned subsidiary Rocky Mountain Gas (“Rocky Mountain Gas”). We agreed tocontinue to operate Rocky Mountain Gas’ properties and provide managementservices for at least 60 days from the termination date. PRB also agreed todrill certain wells that had been previously approved by the State of Wyomingand Rocky Mountain Gas. We plan to operate these wells as provided by the termsof the Operating Agreement between PRB and Rocky Mountain Gas. As a result ofthe termination of the agreements, our working interest was reduced to 10% forall projects initiated after the termination date. Nine exploratory wells wereinitiated after the termination date through March 31, 2006. Accordingly, wehave reclassified 90% of the costs incurred on those wells to accountsreceivable, as these costs are being billed to Rocky Mountain Gas. These coststotaled $713 thousand and were outstanding as of March 31, 2006.

 

InMarch 2006, we notified our customers served by the TOP system that we wereraising our rates to cover cash costs plus 15% for a two month period. Thesecustomers have agreed to the increase. We also advised these customers that wewere planning to shut down the TOP system after the two month period haselapsed. We plan to dismantle the TOP site at that time and plan to sell theequipment not required for our other activities.

 

Duringthe first quarter of 2006, we commenced the drilling of 23 wells. At March 31,2006, we have a total of 13 wells that are producing natural gas and 30 wellsin various stages of drilling or completion.

 

Duringthe first quarter of 2006, we increased our average daily production of naturalgas from 212 thousand cubic feet (“Mcf”) per day at December 31, 2005, to 354 Mcfper day at March 31, 2006, gross and from 85 Mcf per day at December 31, 2005, to143 Mcf per day at March 31, 2006, net.

 

**Resultsof Operations**

 

**The financial information with respect to the quarter endedMarch 31, 2006 and 2005, that is discussed below is unaudited. In the opinionof management, such information contains all adjustments, consisting only ofnormal recurring accruals, necessary for a fair presentation of the results forsuch periods. The results of operations for interim periods are not necessarilyindicative of the results of operations for the full fiscal year.**

 
| ** **                                                   | ** ** | **Quarter Ended March 31,** | ** ** | **Increase / (Decrease)** | ** ** | **Percentage  Change** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------|------------|---------------------------|------------|------------------------|------------|
| ** **                                                   | ** ** | **2006**                    | ** ** | **2005**                  | ** ** | **2006 v 2005**        | ** ** | **2006 v 2005** | ** ** |
| ** **                                                   | ** ** | **(Dollars in thousands)**  | ** ** |
|                                                         |       |                        |       |                      |       |                   |       |   |   |
| Gas gathering revenue                                        |       | $                           | 675        |                      | $          | 841                    |       | $ | (166 | ) | (20 | )% |
| Management fee revenue                                       |       | 94                          |       | —                    |       | 94                     |       | 100 | % |
| Natural gas revenue                                          |       | 58                          |       | —                    |       | 58                     |       | 100 | % |
| Total revenue                                                |       | 827                         |       | 841                       |       | (14                    | )          | (2 | )% |
| Gas gathering expense                                        |       | 588                         |       | 491                       |       | 97                     |       | 20 | % |
| Gas production costs                                         |       | 78                          |       | —                    |       | 78                     |       | 100 | % |
| Exploration expense                                          |       | 97                          |       | —                    |       | 97                     |       | 100 | % |
| Depreciation,  depletion, amortization and accretion expense |       | 320                         |       | 277                       |       | 43                     |       | 16 | % |
| General and administrative expense                           |       | 1,017                       |       | 262                       |       | 755                    |       | nm |   |
| Total operating  expenses                                    |       | 2,100                       |       | 1,030                     |       | 1,070                  |       | 105 | % |
| Operating loss                                               |       | (1,273                      | )          | (189                      | )          | (1,084                 | )          | nm |   |
| Interest and other income                                    |       | 187                         |       | 1                         |       | 186                    |       | nm |   |
| Interest expense                                             |       | (408                        | )          | (42                       | )          | (366                   | )          | nm |   |
| Total other  expense                                         |       | (221                        | )          | (41                       | )          | (180                   | )          | nm |   |
| Net loss                                                     |       | $                           | (1,494     | )                         | $          | (230                   | )          | $ | (1,264 | ) | nm |   |
|                                                         |       |                        |       |                      |       |                   |       |   |   |
| Cash (used in) provided by operating activities              |       | $                           | (1,648     | )                         | $          | 142                    |       | $ | (1,790 | ) | nm |   |
| Cash used in investing activities                            |       | $                           | (3,050     | )                         | $          | (88                    | )          | $ | (2,962 | ) | nm |   |
| Cash provided by (used in) financing activities              |       | $                           | 20,912     |                      | $          | (273                   | )          | $ | 21,185 |   | nm |   |

 

----

nm – percentages greaterthan 200% and comparisons from positive to negative values are considered notmeaningful.

 

14

----

 

***Revenue***

 

Total revenue decreased$14 thousand, or 2%, primarily due to a $272 thousand decrease in gas gatheringrevenues from our TOP, GAP and Bonepile systems resulting from declines involume due to weather related shutdowns. This decrease was offset by gasgathering revenues of $106 thousand applicable to our newly acquired Reclusegas gathering system. We are currently in the process of divesting our assetsrelating to our TOP gathering system, however we have reached agreements withthe producers that they will be charged gas gathering fees based on a cost plus15% basis for an interim period of two months. We plan to dismantle the TOPsite at that time and plan to sell the equipment not required for our otheractivities. We did not have management fee revenue or natural gas revenueduring the quarter ended March 31, 2005.

 

***GasGathering Expense***

 

Gas gathering expenseincreased $97 thousand or 20% mainly due to the $151 thousand increase inRecluse system operating costs resulting from the first quarter 2006acquisition of this system. These costs offset a $54 thousand decrease in gasgathering expenses relating to our TOP system as a result of releasing excesscompression capacity.

 

***GasProduction Costs***

 

We incurred gasproduction costs beginning in the fourth quarter 2005 as a result of our entryinto exploration and production activities. During the first quarter of 2006,gas production costs totaled $78 thousand. Gas production costs exceededrevenue for the quarter primarily due to the impact of severe weather thatreduced production and also resulted in increased operational costs.

 

***ExplorationExpense***

 

We incurred $97 thousandof exploration expense during the first quarter of 2006 relating to drillingcosts applicable to one unsuccessful exploratory well.

 

***Depreciation,Depletion, Amortization and Accretion Expense***

 

Depreciation, depletion,amortization and accretion expense increased $43 thousand or 16% primarily dueto $30 thousand of additional depreciation and amortization expense applicableto the Recluse gas gathering assets which were acquired during the firstquarter of 2006.

 

***Generaland Administrative Expense****  *

 

General andadministrative expense increased $755 thousand mainly due to the recognition of$279 thousand of share-based compensation expense upon the adoption Statementof Financial Accounting Standards (“SFAS”) No. 123(R), *“Share-BasedPayment”* (“SFAS No. 123(R)”). In addition, wages and relatedincreased $187 thousand as a result of increased headcount. Professional feesalso increased $167 thousand due to additional legal, accounting andengineering activities associated with our entering the exploration andproduction business and expanding our gas gathering and processing business.All other general and administrative expense increased $122 thousand, net,during the first quarter of 2006 as compared to the first quarter of 2005.

 

**Liquidityand Capital Resources**

 

***CashFlows and Capital Expenditures***

 

At March 31, 2006,cash and cash equivalents totaled $22.648 million and we had workingcapital of $24.157 million. During the first quarter of 2006, we raised$21.965 million, before expenses, by issuing senior subordinated convertiblenotes. We intend to use these funds for our capital expenditures andacquisition programs.

 

We believe that our cashand cash equivalents on hand, internally generated cash flows and futurefinancing activities will be sufficient to fund our planned operational,drilling and acquisition expenditures for the foreseeable future. The amountand allocation of future capital and exploration 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 we make. Also, the impact of oil and gasprices on investment opportunities, the availability of capital and borrowingfacilities and the success of our exploration and development activities couldlead to 

 

15

----

 

changes in fundingrequirements for future development.

 

***CashFlow Used in Operating Activities******  ***

 

During the first quarterof 2006, our net loss of $1.494 million included non-cash charges of $320thousand of depreciation, depletion, amortization and accretion expense, $279thousand of share-based compensation expense and $64 thousand of interestexpense resulting from amortization of debt issuance costs. In addition, ournet loss includes $97 thousand of exploration expense resulting from writingoff one unsuccessful exploratory well.

 

Cash used in operatingactivities of $1.648 million during the first quarter of 2006 was $1.790million greater than the $142 thousand of cash provided by operating activitiesduring the first quarter of 2005. This increase was mainly attributable tohigher general and administrative expense and increased accounts receivableoffset by a decrease in our accounts payable balance.

 

***CashFlow Used in Investing Activities***

 

Cash used in investingactivities was $3.050 million during the first quarter of 2006representing an increase of $2.962 million as compared to the firstquarter of 2005. During the first quarter 2006, we acquired the Recluse gasgathering system for $1.453 million, invested $1.163 million forwells-in-progress drilling and completion activities, $183 thousand forleasehold acquisitions and $133 thousand for development of proved properties.

 

During the first quarterof 2006, we added $1.140 million to capitalized exploratory drilling andcompletion costs, we did not transfer any costs to proved properties and wecharged $97 thousand, relating to one well, to exploration expense. At March 31,2006, $1.742 million of exploratory drilling and completion costs, relating to30 wells, remained capitalized as wells-in-progress pending the determinationof proved reserves. None of these wells are in areas requiring major capitalexpenditures before production can begin, nor were any of these wells completedmore than one year ago. As of March 31, 2006, we were drilling or completingthese wells or the wells were undergoing de-watering. We believe that after thewells are de-watered we will be able to determine if we have discovered provedreserves. We believe that this determination will be made for the 30wells-in-progress prior to December 31, 2006.

 

Currently, our 2006capital expenditure program calls for investing approximately $21 million inoil and gas exploration, development and acquisition projects and gas gatheringsystem projects. We believe that cash on hand, cash from operating activitiesand cash from future financing actives will be sufficient to meet our operatingand capital expenditure plans for the foreseeable future.

 

***CashFlow from Financing Activities******  ***

 

Cash provided byfinancing activities of $20.912 million for the first quarter of 2006represents an increase of $21.185 million as compared to the first quarterof 2005. During the first quarter of 2006, we raised $21.965 million andincurred $1.051 in debt issuance costs, excluding the value of warrants issued,from the issuance of our senior subordinated convertible notes. During thefirst quarter of 2005, we paid $183 thousand in dividends on our Series A andSeries B Convertible Preferred shares and incurred $90 thousand of deferredcosts related to our initial public offering.

 

***OffBalance-Sheet Arrangements******.******  ***

 

We do not have anyoff-balance sheet financing arrangements as of March 31, 2006, except forour Storm Cat gas gathering services agreement. Our agreement requires StormCat to pay us gas gathering fees on specific minimum volumes of gas whetherthose volumes are delivered and transported through our system or not. See Note2 – Acquisitions and Significant Contracts in Part I, Item 1 of this report.

 

**ContractualObligations**

 

The following tablesummarizes our future commitments as of March 31, 2006 (in thousands):

 
| ** **                       | ** ** | **2006** | ** ** | **2007** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **Thereafter** | ** ** | **Total** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------------|------------|-----------|------------|
| Operating leases                 |       | $        | 394        |     | $          | 254      |       | $        | 236        |     | $          | 235            |       | $         | 215        |   | $ | 514 |   | $ | 1,848 |   |
| Operations contracts             |       | 420      |       | —   |       | —   |       | —   |       | —   |       | —         |       | 420       |       |
| Convertible notes and  term loan |       | 8        |       | 10       |       | 21,972   |       | —   |       | —   |       | —         |       | 21,990    |       |
| Interest on convertible  notes   |       | 1,678    |       | 2,227    |       | 1,414    |       | —   |       | —   |       | —         |       | 5,319     |       |
| Total commitments                |       | $        | 2,500      |     | $          | 2,491    |       | $        | 23,622     |     | $          | 235            |       | $         | 215        |   | $ | 514 |   | $ | 29,577 |   |

 

16

----

 

The above table does notinclude asset retirement obligations, accounts payable or other accruedliabilities recorded on our consolidated balance sheet as of March 31,2006. Asset retirement obligations are not included as we cannot determine withaccuracy the timing of such payments. The table does not include anycommitments entered into after March 31, 2006.

 

We have acquired gasgathering properties and contracts that include operating leases in respect tosurface-use rights that are cancelable in the event that gas gathering activitiescease as a result of declining production. We also have purchase commitmentsfor future field operations and maintenance activities with third partyproviders. In addition, we are a party to non-cancelable operating leases foroffice space, office equipment and other items required for operations,including a compressor for our TOP gas gathering system. The table aboveincludes estimated future purchase commitments relating to these operationssupport contracts. With regard to the operating leases, future minimum leasepayments are calculated based on the contractual rate and period, or if thecontract was a surface-use agreement, future minimum lease payments werecalculated based on the estimated lives of the associated gas reserves (through2014) and the applicable contract rate.

 

**CriticalAccounting Policies and Estimates**

 

***We refer you to the corresponding sectionin Part II, Item 7 of our 2005 Annual Report on Form 10-K, and to the footnotedisclosures included in Part I, Item 1 of this report.***

 

17

----

 

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

 

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

 

**ITEM4: CONTROLS AND PROCEDURES**

 

**Conclusion Regarding the Effectiveness of DisclosureControls and Procedures**

 

Wemaintain disclosure controls and procedures designed to provide reasonableassurance that information required to be disclosed in our reports under theSecurities and Exchange Act of 1934, as amended, is recorded, processed,summarized and reported within the time periods specified in the SecuritiesExchange Commission (“SEC”) rules and forms, and that such information isaccumulated and communicated to our management, including our Chief ExecutiveOfficer and Principal Financial Officer, as appropriate, to allow timelydecisions regarding required disclosure. Our management, with the participationand oversight of our Chief Executive Officer and Principal Financial Officer,evaluated the design and effectiveness of our disclosure controls andprocedures as of March 31, 2006. In conducting this evaluation, severalsignificant deficiencies were identified in our internal control over financialreporting relating to the preparation and review of financial statements anddisclosures, identification and resolution of complex accounting issues, segregationof duties, accounting policies and procedures, information technology systems,and revenue recognition. Management has determined that these significantdeficiencies, in the aggregate, constitute a material weakness in internalcontrol over financial reporting. Specifically, our staffing levels wereinadequate to facilitate the design, implementation and maintenance of aneffective system of internal control.

 

Onthe basis of these findings, our Chief Executive Officer and our PrincipalFinancial Officer have concluded that our disclosure controls and procedureswere not effective, as of March 31, 2006.

 

**Remediation of the Material Weaknesses**

 

Inresponse to the control deficiencies listed above, we have taken (or plan totake during 2006) the following steps to remediate the significant deficienciesidentified above:

 

•       We plan toincrease the accounting staff to provide additional expertise in the areas ofSEC reporting and complex accounting issues. Additionally, we have engagedoutside help to assist us with complex accounting and financial reportingmatters. Continued training of current staff and the need for additionalresources will be evaluated from time to time.

 

•       We plan toimplement disclosure controls and procedures and form a Disclosure Committeewhich will provide additional oversight and control over the completeness andaccuracy of the Company’s financial statements and disclosures included inperiodic filings with the SEC.

 

•       We plan todocument our accounting policies and procedures and enhance our month end closeand financial reporting processes to include additional controls to improve thecompleteness and accuracy of our periodic financial statements.

 

•       We arereplacing our current general ledger software with a more robust accounting andreporting software package that will enable us to increase our controls oversystem generated reports.

 

However,until we have completed a formal review of our internal controls, and even uponcompletion of such review, there is no assurance that we will have adequatelyaddressed the identified deficiencies, as has been characteristic of companiesthat have completed their review of internal control and have had to report onthe results of such review. Accordingly, our internal control over financialreporting may be subject to additional material weaknesses and significantdeficiencies that we have not identified.

 

OnSeptember 21, 2005, the SEC extended the compliance dates related toSection 404 of the Sarbanes-Oxley Act (“Section 404”) for non-acceleratedfilers. Under this extension a company that is not required to file its annualand quarterly reports on an accelerated basis (non-accelerated filer) mustbegin to comply with the Section 404 internal control over financialreporting evaluation and reporting requirements for its first fiscal yearending on or after July 15, 2007. We anticipate that we may become anaccelerated filer in calendar 2006 and therefore we could be required to complywith these requirements for the year ending December 31, 2006. We arecurrently in the process of documenting our internal control structure.

 

18

----

 

**PART IIOTHER INFORMATION**

 

**ITEM1: LEGAL PROCEEDINGS**

 

None.

 

**ITEM1A. RISK FACTORS**

 

For information regardingfactors that could affect our results of operations, financial condition andliquidity, see the risk factors discussion provided under “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” inItem 7 of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2005. See also, “Forward-Looking Statements” included in PartI, Item 2 of this Quarterly Report on Form 10-Q.

 

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

 

**Initial Public Offering**

 

Our registrationstatement on Form S-1 (file number 333-120129) became effective and ourcommon stock commenced trading on the American Stock Exchange on April 12,2005.

 

Net proceeds from theoffering were $10.752 million after expenses.

 

At March 31, 2006, netproceeds from this offering were used as follows:

 
| ** **            | ** ** | **(In thousands)** | ** ** |
|-----------------------|------------|--------------------|------------|
|                  |       |               |       |
| Working capital       |       | $                  | 2,571      |   |
| Capital expenditures  |       | 5,260              |       |
| Repayment of debt     |       | 1,550              |       |
| Dividends             |       | 155                |       |
| Temporary investments |       | 1,216              |       |
| Total use of proceeds |       | $                  | 10,752     |   |

 

With the exception ofdividends paid to an Officer and Directors totaling $3 thousand and $56thousand to persons who owned 10% or more of our Series A and B ConvertiblePreferred stock, no use of proceeds has involved direct or indirect paymentsto: i) our directors, officers or associates; ii) persons owning 10%or more of any class of equity security; or iii) any of our affiliates.

 

The unutilized portion ofthe proceeds is presently being invested in highly liquid, short-terminvestments.

 

**Senior Subordinated ConvertibleNotes**

 

OnMarch 8, 2006, we completed our offering of $21.965 million in seniorsubordinated convertible notes (the “Notes”) to accredited investors. Thisoffering was exempt from registration under Section 4(2) of the Securities Actof 1933 and/or Rule 506 promulgated thereunder. We incurred $1.051 million indebt issuance costs, excluding the value of warrants issued, applicable to thisoffering.

 

Noteholders have the right to convert the Notes to common shares, after the shareshave been registered, at a conversion price of $7.00 per share, whichconversion price is subject to certain anti-dilution adjustments. In the eventthat our common stock trades at $14.00 per share or above for 10 consecutivedays, we have a call provision which allows us to retire the Notes upon 10 daysprior written notice by paying in cash, the principal amount and any accruedbut unpaid interest.

 

**ITEM3: DEFAULTS UPON SENIOR SECURITIES**

 

None.

 

19

----

 

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

 

None.

 

**ITEM5: OTHER INFORMATION**

 

None.

 

**ITEM6: EXHIBITS**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                          |
|---------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **          | ** ** | ** **                                                                                                                                                                                                                               |
| (1.1)               |       | Form of Underwriting Agreement (filed as an  exhibit to Form S-1/A filed on April 12, 2005 and incorporated by  reference herein).                                                                                        |
|                |       |                                                                                                                                                                                                                                     |
| (3.1)               |       | Amended Articles of Incorporation of the Registrant  (filed as an exhibit to Form S-1/A filed on January 28, 2005 and  incorporated by reference herein).                                                                      |
|                |       |                                                                                                                                                                                                                                     |
| (3.2)               |       | Amended By-laws of the Registrant (filed as an  exhibit to Form S-1/A filed on January 28, 2005 and incorporated by  reference herein).                                                                                        |
|                |       |                                                                                                                                                                                                                                     |
| (3.3)               |       | Series A Preferred Stock Certificate of  Designation (filed as an exhibit to Form S-1 filed on November 1,  2004 and incorporated by reference herein).                                                                   |
|                |       |                                                                                                                                                                                                                                     |
| (3.4)               |       | Series B Preferred Stock Certificate of  Designation Filed (filed as an exhibit to Form S-1 filed on  November 1, 2004 and incorporated by reference herein).                                                             |
|                |       |                                                                                                                                                                                                                                     |
| (3.5)               |       | Series C Preferred Stock Certificate of  Designation Filed (filed as an exhibit to Form S-1/A filed on January 28,  2005 and incorporated by reference herein).                                                           |
|                |       |                                                                                                                                                                                                                                     |
| (4.1)               |       | Form of Lockup Agreement—Officers, Directors  and 5% Stockholders (filed as an exhibit to Form S-1/A filed on  November 1, 2004 and incorporated by reference herein).                                               |
|                |       |                                                                                                                                                                                                                                     |
| (4.2)               |       | Form of Lockup Agreement—Series A and B  Preferred Stockholders (filed as an exhibit to Form S-1 filed on  November 1, 2004 and incorporated by reference herein).                                              |
|                |       |                                                                                                                                                                                                                                     |
| (4.3)               |       | Form of Underwriter’s Warrant Agreement (filed  as an exhibit to Form S-1/A filed on January 28, 2005 and  incorporated by reference herein).                                                                        |
|                |       |                                                                                                                                                                                                                                     |
| (4.4)               |       | Form of Lockup Agreement—Series C  Preferred Stockholders (filed as an exhibit to Form S-1/A filed on  January 28, 2005 and incorporated by reference herein).                                                  |
|                |       |                                                                                                                                                                                                                                     |
| (4.5)               |       | Sample Common Stock Certificate (filed as an exhibit  to Form 8-A filed on April 8, 2005).                                                                                                                                     |
|                |       |                                                                                                                                                                                                                                     |
| (4.6)               |       | Form of Senior Subordinated Convertible Note  (filed as an exhibit to Form 10-K on April 14, 2006 and incorporated by  reference herein).                                                                                           |
|                |       |                                                                                                                                                                                                                                     |
| (4.7)               |       | Form of Registration Rights Agreement between  the Company and the holders of the Company’s Senior Subordinated Convertible  Notes (filed as an exhibit to Form 10-K on April 14, 2006 and incorporated by  reference herein). |
|                |       |                                                                                                                                                                                                                                     |
| (5.1)               |       | Opinion of Resch Polster Alpert & Berger  LLP (filed as an exhibit to Form S-8 on September 14, 2005 and  incorporated by reference herein).                                                                          |
|                |       |                                                                                                                                                                                                                                     |
| (10.1)*             |       | Equity Compensation Plan Filed (filed as an exhibit  to Form S-1 filed on November 1, 2004 and incorporated by reference  herein).                                                                                             |
|                |       |                                                                                                                                                                                                                                     |
| (10.2)              |       | Form of Amended and Restated Warrant  Certificate (filed as an exhibit to Form S-1/A filed on March 1,  2005 and incorporated by reference herein).                                                                       |
|                |       |                                                                                                                                                                                                                                     |
| (10.3)              |       | TOP Gathering, LLC Asset Purchase Agreement (filed  as an exhibit to Form S-1/A filed on January 28, 2005 and incorporated  by reference herein).                                                                              |
|                |       |                                                                                                                                                                                                                                     |
| (10.4)              |       | Bear Paw Energy, LLC Purchase and Sale Agreement  (filed as an exhibit to Form S-1 filed on November 1, 2004 and  incorporated by reference herein).                                                                           |

 

20

----

 
| **Exhibit Number** | ** ** | **Description**                                                                                                                                                                                                                                          |
|--------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|               |       |                                                                                                                                                                                                                                                     |
| (10.5)             |       | Bear  Paw Energy, LLC Mortgage, Security Agreement, Assignment of Proceeds, and  Financing Statement (filed as an exhibit to Form S-1/A filed on  January 28, 2005 and incorporated by reference herein).                                      |
|               |       |                                                                                                                                                                                                                                                     |
| (10.6)             |       | Bear  Paw Energy, LLC Promissory Note (filed as an exhibit to Form S-1/A filed  on January 28, 2005 and incorporated by reference herein).                                                                                                     |
|               |       |                                                                                                                                                                                                                                                     |
| (10.7)             |       | Bear  Paw Energy, LLC Operations Agreement (filed as an exhibit to Form S-1  filed on November 1, 2004 and incorporated by reference herein).                                                                                                  |
|               |       |                                                                                                                                                                                                                                                     |
| (10.8)             |       | Bank  of Oklahoma Promissory Note (filed as an exhibit to Form S-1/A filed on  March 1, 2005 and incorporated by reference herein).                                                                                                            |
|               |       |                                                                                                                                                                                                                                                     |
| (10.9)             |       | Bank  of Oklahoma Mortgage and Security Agreement (filed as an exhibit to  Form S-1/A filed on March 1, 2005 and incorporated by reference  herein).                                                                                           |
|               |       |                                                                                                                                                                                                                                                     |
| (10.10)            |       | Gathering  Services Agreement—United Energy Trading, LLC (filed as an exhibit to  Form S-1/A filed on March 1, 2005 and incorporated by reference  herein).                                                                               |
|               |       |                                                                                                                                                                                                                                                     |
| (10.11)            |       | Gathering  Services Agreement—Pennaco Energy Inc. (filed as an exhibit to  Form S-1/A filed on March 1, 2005 and incorporated by reference  herein).                                                                                      |
|               |       |                                                                                                                                                                                                                                                     |
| (10.12)            |       | Gathering  Services Agreement—Natural Gas Fuel Company, Inc. (filed as an exhibit  to Form S-1/A filed on March 1, 2005 and incorporated by reference  herein).                                                                      |
|               |       |                                                                                                                                                                                                                                                     |
| (10.13)            |       | Farmout  and Development Agreement dated August 1, 2005 between Rocky Mountain  Gas, Inc. and PRB Energy, Inc. (filed as an exhibit to  Form 8-K filed on September 9, 2005 and incorporated by reference  herein).             |
|               |       |                                                                                                                                                                                                                                                     |
| (10.14)            |       | Management  Services Agreement dated August 1, 2005 between Rocky Mountain Gas Inc.,  Enterra Energy Trust and PRB Energy, Inc. (filed as an exhibit to  Form 8-K filed on September 9, 2005 and incorporated by reference  herein). |
|               |       |                                                                                                                                                                                                                                                     |
| (10.15)            |       | Form of  Subscription Agreement between the Company and the subscribers to the  Company’s Senior Subordinated Convertible Notes (filed as an exhibit to Form  10-K on April 14, 2006 and incorporated by reference herein).                    |
|               |       |                                                                                                                                                                                                                                                     |
| 10.16              |       | Gathering  Services Agreement - Storm Cat Energy (USA) Operating Corporation                                                                                                                                                                             |
|               |       |                                                                                                                                                                                                                                                     |
| (14.1)             |       | Code  of Business Conduct and Ethics (filed as an exhibit to Form 10-K on April 14,  2006 and incorporated by reference herein).                                                                                                                         |
|               |       |                                                                                                                                                                                                                                                     |
| (23.1)             |       | Consent  of Resch Polster Alpert & Berger LLP—see exhibit 5.1                                                                                                                                                                              |
|               |       |                                                                                                                                                                                                                                                     |
| (23.3)             |       | Consent  of Brownstein. Hyatt and Farber P.C. (filed as an exhibit to Form S-1/A  filed on March 1, 2005 and incorporated by reference herein).                                                                                                |
|               |       |                                                                                                                                                                                                                                                     |
| 31.1               |       | Chief  Executive Officer Certification pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002.                                                                                                                                                  |
|               |       |                                                                                                                                                                                                                                                     |
| 31.2               |       | Principal  Financial Officer Certification pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                              |
|               |       |                                                                                                                                                                                                                                                     |
| 32.1               |       | Chief  Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                              |
|               |       |                                                                                                                                                                                                                                                     |
| 32.2               |       | Principal  Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                          |

 

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

 

----

( )                Previouslyfiled.

 

*                    Managementcontract or compensatory plan or arrangements.

 

21

----

 

**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 Gas Transportation,  Inc. |
|--------|-------------------------------|
|   | (Registrant)                  |
|   |                          |
|   | By:                           | /s/ William P. Brand,  Jr. |   |
|   |                          | William P. Brand, Jr. |
|   |                          | Vice President -  Finance |
|   |                          | (Principal Accounting  Officer) |

 

 

Dated: May 15, 2006

 

22

----