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The RMG note was secured solely by CCBM's interests
in the remaining oil and natural gas leases in Wyoming and Montana.
In connection with the Company's investment in Pinnacle, the Company
received a reduction in the principal amount of the RMG note of
approximately $1.5 million and relinquished the right to receive
certain revenues related to the properties contributed to Pinnacle.
CCBM continues its coalbed methane business
activities and, in addition to its interest in Pinnacle, owns direct
interests in acreage in coalbed methane properties in the Castle
Rock project area in Montana and the Oyster Ridge project area in
Wyoming, which were not contributed to Pinnacle.CCBM and RMG will
continue to conduct exploration and development activities on these
properties as well as pursue other potential acquisitions. Other
than indirectly through Pinnacle, CCBM currently has no proved reserves
of, and is no longer receiving revenue from, coalbed methane gas.
As of December 31, 2004, on a fully diluted
basis, assuming that all parties exercised their Pinnacle Warrants
and Pinnacle Stock Options, the CSFB Parties, CCBM and RMG would
have ownership interests of approximately 54.6%, 22.7% and 22.7%,
respectively. In March 2004, the CSFB Parties contributed additional
funds of $11.8 million into Pinnacle to continue funding the 2004
development program which increased their ownership to 66.7% on
a fully diluted basis should CCBM and RMG each elect not to exercise
their available options.
For accounting purposes, the transaction was
treated as a reclassification of a portion of CCBM's investments
in the contributed properties to an investment in Pinnacle Gas Resources,
Inc. The property contribution made by CCBM to Pinnacle is intended
to be treated as a tax-deferred exchange as constituted by property
transfers under section 351(a) of the Internal Revenue Code of 1986,
as amended.
The reclassification of investments in contributed
properties resulting from the transaction with Pinnacle are reflected
in accordance with the full cost method of accounting in the Company's
December 31, 2003 balance sheet included in this Form 10-K.
5. PROPERTY AND EQUIPMENT
At December 31, 2003 and 2004, property and
equipment consisted of the following:
Oil and natural gas properties not subject
to amortization consist of the cost of unevaluated leaseholds, seismic
costs associated with specific unevaluated properties, exploratory
wells in progress, and secondary recovery projects before the assignment
of proved reserves. These unproved costs are reviewed periodically
by management for impairment, with the impairment provision included
in the cost of oil and natural gas properties subject to amortization.
Factors considered by management in its impairment assessment include
drilling results by the Company and other operators, the terms of
oil and natural gas leases not held by production, production response
to secondary recovery activities and available funds for exploration
and development. Of the $45.1 million of unproved property costs
at December 31, 2004 being excluded from the amortizable base, $5.1
million, $5.8 million and $24.8 million were incurred in 2002, 2003
and 2004, respectively, and $9.4 million was incurred in prior years.
These costs are primarily seismic and lease acquisition costs. The
Company expects it will complete its evaluation of the properties
representing the majority of these costs within the next two to
five years.
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