Commitments and Contingencies

Operating Leases and Other Commitments

The Company leases corporate and field offices in California, Colorado and Texas under agreements expiring over the next five years. In 2006, the Company purchased an airplane for business travel that was subsequently sold and contracted under a ten year operating lease beginning December 2006. The Company also finances vehicles under operating leases, which expire over the next four years. For the years ended December 31, 2012, 2011 and 2010, rent expense with respect to these lease commitments was $3.0 million, $2.6 million and $2.6 million, respectively. The Company currently has seven drilling rigs under contracts that require minimum payments for the full contract term or penalties upon early termination. All of these contracts expire during 2013. All other rigs currently performing work for the Company are on a well-by-well basis and can be released without penalty at the conclusion of drilling on the current well. The Company also has other commitments relating primarily to natural gas purchases, cogeneration facility management services and equipment rentals. Additionally, the Company enters into certain firm commitments to transport natural gas production to market and to transport natural gas to its cogeneration and conventional steam generation facilities. These commitments generally require a minimum monthly charge regardless of whether the contracted capacity is used or not.

The table below shows the Company's future minimum payments under non-cancelable operating leases and other commitments as of December 31, 2012:



(in millions)	Total		2013		2014		2015		2016		2017		Thereafter
Operating leases(1)	$	18.0	$	5.1	$	5.3	$	3.6	$	2.9	$	1.1	$	—
Drilling rig commitments(2)	9.4		9.4		—		—		—		—		—
Other commitments(3)	23.5		16.2		2.9		2.3		2.1		—		—
Firm natural gas transportation contracts(4)	245.1		31.0		33.7		33.4		33.5		33.4		80.1
Total	$	296.0	$	61.7	$	41.9	$	39.3	$	38.5	$	34.5	$	80.1

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(1)	Includes operating leases related to office facilities, vehicles, rail cars and aircraft.


(2)	Excludes obligations related to rigs drilling on a well-by-well basis that can be released after drilling the current well without penalty.


(3)	Includes primarily obligations related to natural gas purchases, cogeneration facility management services, California carbon allowance forward purchase contracts and equipment rentals.


(4)	The Company enters into certain firm commitments to transport natural gas production to market and to transport natural gas for use in its cogeneration and conventional steam generation facilities. These commitments generally require a minimum monthly charge regardless of whether the contracted capacity is used or not.

Uinta Crude Oil Sales Contract

The Company is a party to a crude oil sales contract through June 30, 2013 with a refiner for the purchase of 5,000 Bbl/D of its Uinta light crude oil. Pricing under the contract, which includes transportation and gravity adjustments, is at a fixed percentage of WTI. While the contractual differentials under this contract may be less favorable at times than the posted differential, demand for the Company's 40 degree black wax (light) crude oil can vary seasonally and this contract provides a stable outlet for the Company's crude oil. Gross oil production from the Company's Uinta properties averaged approximately 4,420 Bbl/D in 2012.

E. Texas Gathering System

In July 2009, the Company closed on the financing of its E. Texas natural gas gathering system for $18.4 million in cash. The Company entered into concurrent long-term natural gas gathering agreements for the E. Texas production which contained an embedded lease. The transaction was treated as a financing obligation. Accordingly, the $16.7 million net book value of the property is being depreciated over the remaining useful life of the asset and the cash received of $18.4 million was recorded as a financing obligation. A portion of payments under the agreements are recorded as gathering expense and a portion as interest expense, with the balance being recorded as a reduction to the financing obligation. There are no minimum payments required under these agreements. For the years ended December 31, 2012, 2011 and 2010 the Company incurred $3.2 million, $5.3 million and $6.7 million, respectively, under the agreements.

Carry and Earning Agreement

On January 14, 2011, the Company entered into an amendment relating to certain contractual obligations to a third-party co-owner of certain Piceance assets in Colorado. The amendment waives the $0.2 million penalty for each well not spud by February 2011 and requires the Company to reassign to such co-owner, by January 31, 2020, all of the interest acquired by the Company from the co-owner in each 160-acre tract in which the Company has not drilled and completed a well that is producing or capable of producing from a designated formation, or deeper formation, on January 1, 2020. The amendment also requires the Company to pay the first $9.0 million of costs incurred in connection with the construction of either an extension of the existing access road or a new access road, including the third-party's 50% share. If by June 30, 2013 (which date may be extended until December 31, 2014 if road construction has commenced by June 30, 2013), the Company has not expended $9.0 million ($4.5 million of which would otherwise be such third-party's responsibility) in road construction costs, then it will be obligated to pay the third-party 50% of the difference between $12.0 million and the actual amount expended on road construction as of such date. Due to the need to obtain regulatory approvals, the Company has not yet commenced construction of either an extension of the existing access road or a new access road and may be unable to do so by June 30, 2013, thus triggering the payment obligation to the third-party.

Environmental Matters

The Company has no material accrued environmental liabilities for its sites, including sites in which governmental agencies have designated the Company as a potentially responsible party, because it is not probable that a loss will be incurred and the minimum cost and/or amount of loss cannot be reasonably estimated. However, because of the uncertainties associated with environmental assessment and remediation activities, future expense to remediate the currently identified sites, and sites identified in the future, if any, could be incurred. Management believes, based upon current site assessments, that the ultimate resolution of any matters will not result in material costs incurred.

Legal Matters

Department of the Interior Notice of Proposed Debarment. On June 14, 2012, the Company received a Notice of Proposed Debarment issued by the United States Department of the Interior (DOI). Pursuant to the notice, the DOI's Office of the Inspector General is proposing to debar the Company from participation in certain federal contracts and assistance activities, including oil and natural gas leases, for a period of three years. The basis for the proposed debarment relates to the Company's purported noncompliance with Bureau of Land Management (BLM) regulations relating to the operation of certain equipment, and the submission of related site facility diagrams, in its Uinta operations. In 2011, the Company entered into a settlement agreement with the BLM and paid a $2.1 million civil penalty relating to the matter. The Company intends to contest the proposed debarment and believes the matter is without merit; nevertheless, the Company is currently engaged in discussions with the DOI to resolve the matter administratively.

COGCC Order. On April 21, 2011, the Company received a proposed Order Finding Violation from the Colorado Oil and Gas Conservation Commission (COGCC) alleging that certain releases in late 2007 from a lined reserve pit located on a well pad in western Colorado violated COGCC regulations. Shortly thereafter, the Company entered into negotiations with the COGCC. While the Company denies that it violated any COGCC regulations in connection with the releases, on June 27, 2011, the COGCC approved and the Company later signed an Administrative Order on Consent under which the Company would pay $100,000, and fund a mutually acceptable public project in the amount of $73,000, in full satisfaction of the matter. The Company recorded these amounts in the second quarter of 2011, paid the $100,000 in July 2011 and paid the $73,000 to fund the public project in the third quarter of 2012, settling its obligation under the COGCC order.

Royalty Payments. Certain of the Company's royalty payment calculations are being disputed. On August 1, 2012, a federal court entered a judgment holding that the Company had inappropriately deducted certain post-wellhead deductions from royalty payments. On October 31, 2012, the Company paid the judgment to the royalty owner. The Company's share of the judgment amount was approximately $4.1 million, inclusive of statutory interest, of which approximately $1.3 million was recorded in the first quarter of 2011 under the caption operating costs—oil and natural gas production. The Company recorded an additional $2.1 million in operating costs—oil and natural gas production and $0.7 million in interest expense during the remainder of 2012 in conjunction with the verdict. As of December 31, 2012, the Company may be required to pay amounts of up to approximately $3.9 million with respect to other royalty disputes.

Other. The Company is involved in various other lawsuits, claims and inquiries, most of which are routine to the nature of its business. In the opinion of management, the resolution of these matters will not have a material effect on its financial position, results of operations or operating cash flows.