(3) Investments in Piceance Energy

9 Months Ended

Sep. 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 September 30, 2013, the balance outstanding on the revolving credit facility was approximately $90.0 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 September 30,  2013			Nine Months Ended September 30,  2013
	(in thousands)
Beginning balance	$	103,815			$	104,434
Income (loss) from unconsolidated affiliates		(907	)			(1,772	)
Capitalized drilling costs obligation paid		15				261
Ending balance	$	102,923			$	102,923

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

	September 30, 2013
		100%		Our Share
	(Unaudited)
	(in thousands)
Assets
Cash and equivalents	$	23		$	8
Accounts receivable		3,486			1,162
Prepaids and other assets		1,323			441
Total current assets		4,832			1,611
Natural gas and oil property, successful efforts method of accounting		549,327			183,146
Other real estate and land		14,314			4,772
Office furniture and equipment		3,110			1,037
Total		566,751			188,955
Less: accumulated depletion, depreciation and amortization		(107,216	)		(35,746	)
Total property and equipment, net		459,535			153,209
Deferred issue costs and other assets, net		953			318
Total assets	$	465,320		$	155,138

	September 30, 2013
		100%		Our Share
	(Unaudited)
	(in thousands)
Accounts payable and accrued liabilities	$	5,023		$	1,675
Natural gas and oil sales payable		11,041			3,681
Derivative liabilities		542			181
Total current liabilities		16,606			5,537
Note payable		90,000			30,006
Asset retirement obligations		2,959			987
Total non-current liabilities		92,959			30,993
Total liabilities		109,565			36,530
Members equity
Members’ equity		365,046			121,706
Accumulated deficit		(9,291	)		(3,098	)
Total members’ equity		355,755			118,608
Total liabilities and members’ equity	$	465,320		$	155,138

At September 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 September 30, 2013
	100%			Our Share
	(Unaudited)
	(in thousands)
Natural gas, oil and natural gas liquids revenues	$	14,622		$	4,875
Natural gas and oil operating expenses		7,416			2,473
Depletion, depreciation and amortization		6,897			2,299
Management fee		1,950			650
General and administrative		447			149
Total operating expenses		16,710			5,571
Loss from operations		(2,088	)		(696	)
Other income (expense)
Income from derivatives		106			35
Interest expense and debt issue costs		(718	)		(239	)
Other expense		(20	)		(7	)
Total other expense, net		(632	)		(211	)
Net loss	$	(2,720	)	$	(907	)

	Nine Months Ended  September 30, 2013
	100%			Our Share
	(Unaudited)
	(in thousands)
Natural gas, oil and natural gas liquids revenues	$	44,076		$	14,695
Natural gas and oil operating expenses		22,160			7,388
Depletion, depreciation and amortization		17,557			5,854
Management fee		5,850			1,950
General and administrative		2,420			807
Total operating expenses		47,987			15,999
Loss from operations		(3,911	)		(1,304	)
Other income (expense)
Income from derivatives		825			275
Interest expense and debt issue costs		(2,139	)		(713	)
Other expense		(91	)		(30	)
Total other expense, net		(1,405	)		(468	)
Net loss	$	(5,316	)	$	(1,772	)