(3) Investments in Piceance Energy

6 Months Ended

Jun. 30, 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. As of June 30, 2013, the balance outstanding on the revolving credit facility was approximately $91.0 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. Some of our contracts require a minimum throughput commitment.

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

	Three Months  Ended June 30, 2013	Six Months Ended June 30, 2013
	(in thousands)
Beginning balance	$102,292	$104,434
Income (loss) from unconsolidated affiliates	1,495	(865)
Capitalized drilling costs obligation paid	28	246
Ending balance	$103,815	$103,815

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

	June 30, 2013
	100%	Our Share
	(Unaudited)
	(in thousands)
Assets
Cash and equivalents	$35	$12
Accounts receivable	3,972	1,324
Prepaids and other assets	1,661	554
Total current assets	5,668	1,890
Natural gas and oil property, successful efforts method of accounting	544,266	181,458
Other real estate and land	14,314	4,772
Office furniture and equipment	3,116	1,039
Total	561,696	187,269
Less: accumulated depletion, depreciation and amortization	(100,329)	(33,450)
Total property and equipment, net	461,367	153,819
Deferred issue costs and other assets, net	1,026	342
Total assets	$468,061	$156,051

	June 30, 2013
	100%	Our Share
	Unaudited)
	(in thousands)
Liabilities and Members’ Equity
Accounts payable and accrued liabilities	$13,285	$4,428
Natural gas and oil sales payable	1,780	595
Derivative liabilities	397	132
Total current liabilities	15,462	5,155
Note payable	91,000	30,339
Asset retirement obligations	2,920	974
Derivative liabilities	204	68
Total non-current liabilities	94,124	31,381
Total liabilities	109,586	36,536
Members equity
Members’ equity	365,046	121,706
Accumulated deficit	(6,571)	(2,191)
Total members’ equity	358,475	119,515
Total liabilities and members’ equity	$468,061	$156,051

At June 30, 2013, our members’ 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 June 30, 2013
	100%	Our Share
	(Unaudited)
	(in thousands)
Natural gas, oil and natural gas liquids revenues	$15,467	$5,157
Natural gas and oil operating expenses	7,222	2,408
Depletion, depreciation and amortization	4,232	1,411
Management fee	1,950	650
General and administrative	382	128
Total operating expenses	13,786	4,597
Income from operations	1,681	560
Other income (expense)
Income from derivatives	3,587	1,196
Interest expense and debt issue costs	(724)	(241)
Other expense	(61)	(20)
Total other income (expense)	2,802	935
Net income	$4,483	$1,495

	Six Months Ended June 30, 2013
	100%	Our Share
	(Unaudited)
	(in thousands)
Natural gas, oil and natural gas liquids revenues	$29,454	$9,820
Natural gas and oil operating expenses	14,744	4,916
Depletion, depreciation and amortization	10,661	3,554
Management fee	3,900	1,300
General and administrative	1,973	658
Total operating expenses	31,278	10,428
Loss from operations	(1,824)	(608)
Other income (expense)
Income from derivatives	720	240
Interest expense and debt issue costs	(1,421)	(473)
Other expense	(71)	(24)
Total other expense	(772)	(257)
Net loss	$(2,596)	$(865)