(3) Investments in Piceance Energy

3 Months Ended

Mar. 31, 2013

Notes

(3) Investments in Piceance Energy

(3) Investments in Piceance Energy

We account for our 33.34% ownership interest in Piceance Energy using the equity method of accounting because we are able to exert significant influence, but do not control the operating and financial policies, and as a result, we do not meet the accounting criteria which require us to consolidate the joint venture. The LLC Agreement provides that its sole manager may make a written capital call such that each member shall make additional capital contributions up to an aggregate combined total capital contribution of $60 million ($20 million to our interest), if approved by a majority of its board. If any member does not fund its share of the capital call, its interest may be reduced or diluted by the amount of the shortfall. In addition, Piceance Energy has a $400 million secured revolving credit facility secured by a lien on its natural gas and oil properties and related assets with a borrowing base currently set at $140 million. We are guarantors of Piceance Energy’s credit facility, with recourse limited to the pledge of our equity interests of Par Piceance Energy. Under the terms of its credit facility, Piceance Energy is generally prohibited from making future cash distributions to its owners, including us.

Piceance Energy holds various commodity hedging instruments to mitigate a portion of the effect of natural gas and oil price fluctuations. The contracts are in the form of costless collars of 15,000 MMBtu/day with floors of an average of $3.37 and ceilings of an average of $4.28 with 5,000 MMBtu/day through March 2014 and 10,000 MMBtu/day  through September 2014, and as well as swaps of 10,000 MMBtu/day for an average price of $3.46 through September 2014. Piceance Energy also holds natural gas gathering and processing contracts for a fixed rate expiring on various dates beginning in 2017 through 2032. One of the contracts require a minimum throughput commitment.

The change in our equity investment in Piceance Energy is as follows:

	Three Months Ended March 31, 2013
	(in thousands)
Beginning balance.............................................................................................	$104,434
Loss from unconsolidated affiliates..............................................................	(2,360)
Capitalized drilling costs obligation paid.......................................................	218
Ending balance..................................................................................................	$      102,292

Summarized balance sheet information and our share of the equity investment are as follows:

	March 31, 2013
	100%	Our Share
	(Unaudited)
Assets
Cash and equivalents	$1,001	$334
Accounts receivable	4,166	1,389
Prepaids and other assets	447	149
Total current assets	5,614	1,872
Natural gas and oil property, successful efforts method	535,558	178,555
Other real estate and land	14,314	4,772
Office furniture and equipment	3,115	1,039
Total	552,987	184,366
Less: accumulated depletion, depreciation and amortization	(96,097)	(32,039)
Total property and equipment, net	456,890	152,327
Deferred issue costs and other assets, net	904	301
Total assets	$463,408	$154,500

	March 31, 2013
	100%	Our Share
	(Unaudited)
Liabilities and Members’ Equity
Accounts payable and accrued liabilities............................	$11,929	$3,977
Natural gas and oil sales payable..........................................	1,589	530
Derivative liabilities..................................................................	2,776	926
Total current liabilities..................................................	16,294	5,433
Note payable.............................................................................	89,000	29,672
Asset retirement obligation.....................................................	2,882	961
Derivative liabilities..................................................................	1,240	413
Total non-current liabilities...............................	93,122	31,046
Total liabilities...........................................................................	109,416	36,479
Members equity........................................................................
Members’ equity	365,046	121,706
Accumulated deficit................................................................	(11,054)	(3,685)
Total equity..........................................................	353,992	118,021
Total liabilities and members’ equity...................................	$463,408	$154,500

At March 31, 2013, our equity in the underlying net assets of Piceance Energy exceeded the carrying value of our investment recorded on our consolidated balance sheet by approximately $15.7 million. We attribute this difference, which is expected to be permanent, to lack of control and marketability discounts.

Summarized income statement information and our share for the period for which our investment was accounted for under the equity method is as follows:

	Three Months Ended March 31, 2013
	100%	Our Share
	(Unaudited)
Natural gas, oil and natural gas liquids revenues	$13,987	$4,663
Natural gas and oil operating expenses	9,078	3,027
Depletion, depreciation and amortization	6,429	2,143
Management fee	1,950	650
General and administrative	34	11
Total operating expenses	17,491	5,831
Loss from operations	(3,504)	(1,168)
Other income (expense)
Loss from derivatives	(2,868)	(956)
Interest expense and debt issue costs	(697)	(233)
Other expense	(10)	(3)
Total other expense	(3,575)	(1,192)
Net loss	$(7,079)	$(2,360)