Edgar Filing: PETROLEUM DEVELOPMENT CORP

form10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2010

o Transition Report Pursuant to Section 13 of 15(d) of the Securities Exchange Act of 1934

For the transition period from to ____

Commission File Number: 000-07246

PETROLEUM DEVELOPMENT CORPORATION

(Exact name of registrant as specified in its charter)

(Doing Business as PDC Energy)

Nevada		95-2636730
(State of incorporation)		(I.R.S. Employer Identification No.)

1775 Sherman Street, Suite 3000

Denver, Colorado 80203

(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (303) 860-5800

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨	Accelerated filer x
Non-accelerated filer ¨	Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 19,250,109 shares of the Company's Common Stock ($.01 par value) were outstanding as of July 31, 2010.

EXPLANATORY NOTE

Effective July 15, 2010, Petroleum Development Corporation began conducting business as PDC Energy. A new logo and corporate identity accompanied this change. Our common stock continues to trade on the NASDAQ Global Select Market under the ticker symbol PETD. We continue to maintain our website address, www.petd.com, which reflects the new PDC Energy name and brand identity. This change reflects the transitioning change in our business model, from a company that was predominately a sponsor of limited partnerships to a natural gas and oil company that explores for and develops natural gas and oil resources and markets its production. We believe that the name PDC Energy more fully portrays the range of business activities in which we engage.

PETROLEUM DEVELOPMENT CORPORATION

(dba PDC Energy)

INDEX

	PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Operations	4
	Condensed Consolidated Statements of Cash Flows	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38
Item 4.	Controls and Procedures	40



	PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	40
Item 1A.	Risk Factors	40
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	41
Item 3.	Defaults Upon Senior Securities	41
Item 4.	[Removed and Reserved]	41
Item 5.	Other Information	41
Item 6.	Exhibits	42


	SIGNATURES	43

Index

NOTE REGARDING FORWARD-LOOKING STATEMENTS

This periodic report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 ("Securities Act") and Section 21E of the Securities Exchange Act of 1934 ("Exchange Act") regarding our business, financial condition, results of operations and prospects. All statements other than statements of historical facts included in and incorporated by reference into this report are forward-looking statements. Words such as expects, anticipates, intends, plans, believes, seeks, estimates and similar expressions or variations of such words are intended to identify forward-looking statements herein, which include statements of estimated natural gas and oil production and reserves, drilling plans, future cash flows, anticipated liquidity, anticipated capital expenditures and our management’s strategies, plans and objectives. However, these are not the exclusive means of identifying forward-looking statements herein. Although forward-looking statements contained in this report reflect our good faith judgment, such statements can only be based on facts and factors currently known to us. Consequently, forward-looking statements are inherently subject to risks and uncertainties, including risks and uncertainties incidental to the exploration for, and the acquisition, development, production and marketing of natural gas and oil, and actual outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. Important factors that could cause actual results to differ materially from the forward-looking statements include, but are not limited to:

changes in production volumes, worldwide demand and commodity prices for natural gas and oil;

changes in estimates of proved reserves;

declines in the values of our natural gas and oil properties resulting in impairments;

the timing and extent of our success in discovering, acquiring, developing and producing natural gas and oil reserves;

our ability to acquire leases, drilling rigs, supplies and services at reasonable prices;

the availability and cost of capital to us;

reductions in the borrowing base under our credit facility;

risks incident to the drilling and operation of natural gas and oil wells;

future production and development costs;

the availability of sufficient pipeline and other transportation facilities to carry our production and the impact of these facilities on price;

the effect of existing and future laws, governmental regulations and the political and economic climate of the United States of America ("U.S.");

changes in environmental laws and the regulations and enforcement related to those laws;

the identification of and severity of environmental events and governmental responses to the events;

the effect of natural gas and oil derivative activities;

conditions in the capital markets; and

losses possible from pending or future litigation.

Further, we urge you to carefully review and consider the cautionary statements made in this report, our annual report on Form 10-K for the year ended December 31, 2009, filed with the Securities and Exchange Commission ("SEC") on March 4, 2010 ("2009 Form 10-K"), and our other filings with the SEC and public disclosures. We caution you not to place undue reliance on forward-looking statements, which speak only as of the date of this report. Other than as required under the securities laws, we undertake no obligation to update any forward-looking statements in order to reflect any event or circumstance occurring after the date of this report or currently unknown facts or conditions or the occurrence of unanticipated events.

REFERENCES

Unless the context otherwise requires, references to "PDC Energy," "the Company," "we," "us," "our," "ours" or "ourselves" in this report refer to the registrant, Petroleum Development Corporation ("PDC"), together with its wholly owned subsidiaries, an entity in which it has a controlling financial interest and its proportionate share of affiliated partnerships and PDC Mountaineer, LLC ("PDCM"), a joint venture with Lime Rock Partners.

Index

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

PETROLEUM DEVELOPMENT CORPORATION

(dba PDC Energy)

Condensed Consolidated Balance Sheets

(unaudited; in thousands, except share data)

	June 30, 2010			December 31, 2009*
Assets
Current assets:
Cash and cash equivalents	$	19,447		$	31,944
Restricted cash		2,490			2,490
Accounts receivable, net		44,929			56,491
Accounts receivable affiliates		8,133			7,956
Fair value of derivatives		39,504			42,223
Income tax receivable		-			27,728
Prepaid expenses and other current assets		1,914			8,538
Total current assets		116,417			177,370
Properties and equipment, net		938,920			979,373
Assets held for sale		23,293			28,820
Fair value of derivatives		45,873			20,228
Accounts receivable affiliates		13,045			15,473
Other assets		30,094			29,063
Total Assets	$	1,167,642		$	1,250,327

Liabilities and Equity
Liabilities
Current liabilities:
Accounts payable	$	43,197		$	36,845
Accounts payable affiliates		9,802			13,015
Production tax liability		15,008			24,849
Fair value of derivatives		18,691			20,208
Funds held for distribution		23,422			28,256
Other accrued expenses		23,175			21,261
Total current liabilities		133,295			144,434
Long-term debt		237,802			280,657
Deferred income taxes		184,642			178,012
Asset retirement obligation		24,466			29,314
Fair value of derivatives		38,038			48,779
Accounts payable affiliates		13,362			5,996
Other liabilities		20,073			24,542
Total liabilities		651,678			711,734

COMMITMENTS AND CONTINGENT LIABILITIES

Equity
Shareholders' equity:
Preferred shares, par value $.01 per share; authorized 50,000,000 shares; issued: none		-			-
Common shares, par value $.01 per share; authorized 100,000,000 shares; issued: 19,264,213 shares for 2010 and 19,242,219 for 2009		193			192
Additional paid-in capital		68,163			64,406
Retained earnings		447,624			426,629
Treasury shares, at cost; 8,273 shares in 2010 and in 2009		(312	)		(312	)
Total shareholders' equity		515,668			490,915
Noncontrolling interest		296			47,678
Total equity		515,964			538,593
Total Liabilities and Equity	$	1,167,642		$	1,250,327

__________

*Derived from audited 2009 balance sheet.

See accompanying notes to condensed consolidated financial statements.

Index

PETROLEUM DEVELOPMENT CORPORATION

(dba PDC Energy)

Condensed Consolidated Statements of Operations

(unaudited; in thousands, except per share data)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2010			2009			2010			2009

Revenues:
Natural gas and oil sales	$	49,401		$	40,402		$	108,063		$	78,569
Sales from natural gas marketing		12,589			11,306			35,276			32,138
Commodity price risk management gain (loss), net		12,257			(23,284	)		55,479			399
Well operations, pipeline income and other		2,167			2,772			4,768			5,434
Total revenues		76,414			31,196			203,586			116,540

Costs, expenses and other:
Natural gas and oil production and well operations costs		16,385			13,677			31,532			29,537
Cost of natural gas marketing		12,207			10,895			34,530			31,241
Exploration expense		3,830			3,134			10,248			8,777
General and administrative expense		9,855			14,784			20,549			26,878
Depreciation, depletion and amortization		27,117			33,259			54,773			67,145
Gain on sale of leaseholds		(96	)		-			(96	)		(120	)
Total costs, expenses and other		69,298			75,749			151,536			163,458

Operating income (loss)		7,116			(44,553	)		52,050			(46,918	)
Interest income		34			12			39			32
Interest expense		(7,672	)		(9,420	)		(15,472	)		(17,803	)

Income (loss) from continuing operations before income taxes		(522	)		(53,961	)		36,617			(64,689	)
Provision (benefit) for income taxes		(192	)		(20,663	)		13,766			(25,088	)
Income (loss) from continuing operations		(330	)		(33,298	)		22,851			(39,601	)
Income (loss) from discontinued operations, net of tax		(2,405	)		203			(1,917	)		787
Net income (loss)		(2,735	)		(33,095	)		20,934			(38,814	)
Less: net loss attributable to noncontrolling interest		(6	)		(16	)		(61	)		(32	)
Net income (loss) attributable to shareholders	$	(2,729	)	$	(33,079	)	$	20,995		$	(38,782	)

Amounts attributable to shareholders:
Income (loss) from continuing operations	$	(324	)	$	(33,282	)	$	22,912		$	(39,569	)
Income (loss) from discontinued operations		(2,405	)		203			(1,917	)		787
Net income (loss) attributable to shareholders	$	(2,729	)	$	(33,079	)	$	20,995		$	(38,782	)

Earnings (loss) per share attributable to shareholders:
Basic
Income (loss) from continuing operations	$	(0.02	)	$	(2.25	)	$	1.19		$	(2.67	)
Income (loss) from discontinued operations		(0.13	)		0.01			(0.10	)		0.05
Net income (loss) attributable to shareholders	$	(0.15	)	$	(2.24	)	$	1.09		$	(2.62	)

Diluted
Income (loss) from continuing operations	$	(0.02	)	$	(2.25	)	$	1.19		$	(2.67	)
Income (loss) from discontinued operations		(0.13	)		0.01			(0.10	)		0.05
Net income (loss) attributable to shareholders	$	(0.15	)	$	(2.24	)	$	1.09		$	(2.62	)

Weighted average common shares outstanding:
Basic		19,213			14,811			19,202			14,802
Diluted		19,213			14,811			19,296			14,802

See accompanying notes to condensed consolidated financial statements.

Index

PETROLEUM DEVELOPMENT CORPORATION

(dba PDC Energy)

Condensed Consolidated Statements of Cash Flows

(unaudited, in thousands)

	Six Months Ended
	June 30,
	2010			2009

Cash flows from operating activities:
Net income (loss)	$	20,934		$	(38,814	)
Adjustments to net income (loss) to reconcile to cash provided by operating activities:
Deferred income taxes		11,885			(21,986	)
Depreciation, depletion and amortization		55,867			68,220
Exploratory dry hole costs		3,552			937
Amortization and impairment of unproved properties		1,156			1,132
Impairment of proved natural gas and oil properties		4,506			-
Unrealized loss (gain) on derivative transactions		(24,701	)		60,762
Other		4,980			7,155
Changes in assets and liabilities		17,192			(16,747	)
Net cash provided by operating activities		95,371			60,659

Cash flows from investing activities:
Capital expenditures		(77,861	)		(104,371	)
Deconsolidation/change in ownership effect on cash and cash equivalents		(3,472	)		-
Other		746			328
Net cash used in investing activities		(80,587	)		(104,043	)

Cash flows from financing activities:
Proceeds from credit facility		130,000			170,500
Repayment of credit facility		(173,000	)		(147,000	)
Payment of debt issuance costs		(205	)		(8,943	)
Excess tax benefits from stock-based compensation		84			-
Change in ownership interest in PDCM		16,173			-
Purchase of treasury stock		(333	)		(219	)
Net cash provided by (used in) financing activities		(27,281	)		14,338

Net decrease in cash and cash equivalents		(12,497	)		(29,046	)
Cash and cash equivalents, beginning of period		31,944			50,950
Cash and cash equivalents, end of period	$	19,447		$	21,904


Supplemental cash flow information:
Cash payments (receipts) for:
Interest, net of capitalized interest	$	15,607		$	17,190
Income taxes, net of refunds		(27,042	)		(3,600	)
Non-cash investing activities:
Change in accounts payable related to purchases of properties and equipment		10,944			(37,699	)
Change in asset retirement obligation, with a corresponding increase to natural gas and oil properties, net of disposals		723			667
See Note 13 for non-cash transactions related to PDCM

See accompanying notes to condensed consolidated financial statements.

Index

PETROLEUM DEVELOPMENT CORPORATION

(dba PDC Energy)

Notes to Condensed Consolidated Financial Statements

June 30, 2010

(unaudited)

1.	NATURE OF OPERATIONS AND BASIS OF PRESENTATION

We are a domestic independent natural gas and oil company engaged in the exploration for and the acquisition, development, production and marketing of natural gas and oil. As of June 30, 2010, we owned an interest in and operated approximately 5,000 gross wells located primarily in the Rocky Mountain Region and Appalachian Basin. We are engaged in two primary business segments: natural gas and oil sales and natural gas marketing.

The accompanying unaudited condensed consolidated financial statements include the accounts of PDC, our wholly owned subsidiaries, an entity in which we have a controlling financial interest, and our proportionate share of PDCM and our affiliated partnerships. All material intercompany accounts and transactions have been eliminated in consolidation. We account for our investment in PDCM and our interests in natural gas and oil limited partnerships under the proportionate consolidation method. Accordingly, our accompanying condensed consolidated financial statements include our pro rata share of assets, liabilities, revenues and expenses of 34 entities which we proportionately consolidate. Our proportionate share of all significant transactions between us and these entities has been eliminated. See Notes 2 and 13 for the impact of new accounting changes on the consolidation of PDCM, a variable interest entity, on January 1, 2010.

In our opinion, the accompanying financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation of our financial statements for interim periods in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the SEC. Accordingly, pursuant to such rules and regulations, certain notes and other financial information included in audited financial statements have been condensed or omitted. The information presented in this quarterly report on Form 10-Q should be read in conjunction with our audited consolidated financial statements and notes thereto included in our 2009 Form 10-K. Our accounting policies are described in the Notes to Consolidated Financial Statements in our 2009 Form 10-K and updated, as necessary, in this Form 10-Q. The results of operations for the six months ended June 30, 2010, and the cash flows for the same period, are not necessarily indicative of the results to be expected for the full year or any other future period.

Certain prior year amounts in the accompanying financial statements and related notes have been reclassified to conform to the current year presentation. The reclassifications are directly related to the sale of our Michigan assets and related discontinued operations. The reclassifications had no impact on previously reported cash flows, net income, earnings per share or shareholders' equity. See Note 12 for additional information regarding our assets held for sale and discontinued operations.

2.	RECENT ACCOUNTING STANDARDS

Recently Adopted Accounting Standards

Consolidation – Variable Interest Entities. In June 2009, the Financial Accounting Standards Board ("FASB") issued changes regarding an entity’s analysis to determine whether any of its variable interests constitute controlling financial interests in a variable interest entity. This analysis identifies the primary beneficiary of a variable interest entity as the enterprise that has both of the following characteristics:

the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance; and

the obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity.

Additionally, the entity is required to assess whether it has an implicit financial responsibility to ensure that a variable interest entity operates as designed when determining whether it has the power to direct the activities of the variable interest entity that most significantly impact the entity’s economic performance. The guidance also requires ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. We adopted these changes effective January 1, 2010. Upon adoption, we deconsolidated PDCM based upon the fact that power over the activities that significantly impact this joint venture is equally shared with our investment partner. No cumulative effect adjustment to retained earnings was recognized upon adoption. See Note 13 for the impact of adoption on our financial statements.

Index

PETROLEUM DEVELOPMENT CORPORATION

(dba PDC Energy)

Notes to Condensed Consolidated Financial Statements

June 30, 2010

(unaudited, continued)

Fair Value Measurements and Disclosures. In January 2010, the FASB issued changes clarifying existing disclosure requirements related to fair value measurements. The update also added a new requirement to disclose fair value transfers in and out of Levels 1 and 2 and describe the reasons for the transfers. The adoption of these changes as of January 1, 2010, did not have a material impact on our financial statements.

Recently Issued Accounting Standards

Fair Value Measurements and Disclosures. In January 2010, the FASB issued changes related to fair value measurements requiring gross presentation of activities within the Level 3 roll forward, whereby entities must present separately information about purchases, sales, issuances and settlements. These changes will be effective for our financial statements issued for annual reporting periods beginning after December 15, 2010. We do not expect the adoption of this change to have a material impact on our financial statements.

3.	FAIR VALUE MEASUREMENTS

Derivative Financial Instruments. We measure the fair value of our derivative instruments based upon quoted market prices, where available. Our valuation determination includes: (1) identification of the inputs to the fair value methodology through the review of counterparty statements and other supporting documentation, (2) determination of the validity of the source of the inputs, (3) corroboration of the original source of inputs through access to multiple quotes, if available, or other information and (4) monitoring changes in valuation methods and assumptions. The methods described above may produce a fair value calculation that may not be indicative of future fair values. Our valuation determination also gives consideration to nonperformance risk on our own liabilities as well as the credit standing of our counterparties. We primarily use financial institutions, who are also major lenders in our credit facility agreement, as counterparties to our derivative contracts. We have evaluated the credit risk of the counterparties holding our derivative assets using relevant credit market default rates, giving consideration to amounts outstanding for each counterparty and the duration of each outstanding derivative position. Based on our evaluation, as of June 30, 2010, the impact of nonperformance risk on the fair value of our derivative assets and liabilities was not significant. Validation of our contracts’ fair value is performed internally and while we use common industry practices to develop our valuation techniques, changes in our pricing methodologies or the underlying assumptions could result in significantly different fair values. While we believe these valuation methods are appropriate and consistent with those used by other market participants, the use of different methodologies, or assumptions, to determine the fair value of certain financial instruments could result in a different estimate of fair value.

The following table presents, by hierarchy level, our derivative financial instruments, including both current and non-current portions, measured at fair value.

	June 30, 2010									December 31, 2009
	Quoted Prices in Active Markets (Level 1)			Significant Unobservable Inputs (Level 3)			Total			Quoted Prices in Active Markets (Level 1)			Significant Unobservable Inputs (Level 3)			Total
	(in thousands)
Assets:
Commodity based derivatives	$	55,826		$	29,488		$	85,314		$	25,598		$	36,796		$	62,394
Basis protection derivative contracts		-			63			63			-			57			57
Total assets		55,826			29,551			85,377			25,598			36,853			62,451
Liabilities:
Commodity based derivatives		(51	)		(6,080	)		(6,131	)		(3,140	)		(9,932	)		(13,072	)
Basis protection derivative contracts		-			(50,598	)		(50,598	)		-			(55,915	)		(55,915	)
Total liabilities		(51	)		(56,678	)		(56,729	)		(3,140	)		(65,847	)		(68,987	)
Net asset (liability)	$	55,775		$	(27,127	)	$	28,648		$	22,458		$	(28,994	)	$	(6,536	)

Index

PETROLEUM DEVELOPMENT CORPORATION

(dba PDC Energy)

Notes to Condensed Consolidated Financial Statements

June 30, 2010

(unaudited, continued)

The following table presents the changes in our Level 3 derivative financial instruments measured on a recurring basis.

	(in thousands)

Fair value, net liability, as of December 31, 2009	$	(28,994	)
Changes in fair value included in statement of operations line items:
Commodity price risk management gain (loss), net		26,610
Sales from natural gas marketing		352
Cost of natural gas marketing		(3,388	)
Changes in fair value included in balance sheet line items (1):
Accounts receivable affiliates		2,344
Accounts payable affiliates		(4,247	)
Settlements included in statement of operations line items:
Commodity price risk management gain (loss), net		(22,023	)
Sales from natural gas marketing		(183	)
Cost of natural gas marketing		2,402
Fair value, net liability, as of June 30, 2010	$	(27,127	)

Changes in unrealized gains (losses) relating to assets (liabilities) still held as of June 30, 2010, included in statement of operations line items:
Commodity price risk management gain (loss), net	$	22,148
Sales from natural gas marketing activities		176
Cost of natural gas marketing activities		(1,879	)
	$	20,445

__________

(1)

Represents the change in fair value related to derivative instruments entered into by us and designated to our affiliated partnerships.

See Note 4 for additional disclosure related to our derivative financial instruments.

Non-Derivative Assets and Liabilities. The carrying values of the financial instruments comprising current assets and current liabilities approximate fair value due to the short-term maturities of these instruments.

The portion of our long-term debt related to our credit facility approximates fair value due to the variable nature of its related interest rate. We have not elected to account for the portion of our long-term debt related to our senior notes under the fair value option; however, we estimate the fair value of this portion of our long-term debt to be $207.3 million or 103.2% of par value as of June 30, 2010. We determined this valuation based upon measurements of trading activity.

We assess our natural gas and oil properties for possible impairment, upon a triggering event, by comparing net capitalized costs to estimated undiscounted future net cash flows on a field-by-field basis using estimated production based upon prices at which we reasonably estimate the commodity to be sold. The estimates of future prices may differ from current market prices of natural gas and oil. Certain events, including but not limited to, downward revisions in estimates to our reserve quantities, expectations of falling commodity prices or rising operating costs, could result in a triggering event and, therefore, a possible impairment of our natural gas and oil properties. If net capitalized costs exceed undiscounted future net cash flows, the measurement of impairment is based on estimated fair value utilizing a future discounted cash flows analysis and is measured by the amount by which the net capitalized costs exceed their fair value. In May 2010, pursuant to our entry into an agreement to sell our Michigan assets, we reclassified our Michigan assets and related liabilities to held for sale, see Note 12. The agreement to sell these assets, a triggering event, required us to perform an impairment test as long lived assets held for sale are required to be measured at the lower of carrying value or fair value less costs to sell. We compared the transactional sales price, considered a Level 3 input, less costs to sell to the carrying value of our Michigan net assets. Since the net carrying value exceeded the net sales price, we were required to recognize an impairment charge by reducing the carrying value of the net assets to reflect the net sales price. As a result, during the three months ended June 30, 2010, we recorded an impairment charge of $4.5 million related to the sale of our Michigan assets. The impairment charge is reflected in discontinued operations in the statement of operations.

Index

PETROLEUM DEVELOPMENT CORPORATION

(dba PDC Energy)

Notes to Condensed Consolidated Financial Statements

June 30, 2010

(unaudited, continued)

We estimate the fair value of our plugging and abandonment obligations based on a discounted cash flows analysis. If the fair value of the estimated asset retirement obligation changes, an adjustment is recorded to both the asset retirement obligation and the asset retirement cost. Changes in estimated asset retirement obligations can result from changes in estimated retirement costs or changes in the estimated timing of payments to settle the asset retirement obligations. See Note 8 for changes in our asset retirement obligations.

4.	DERIVATIVE FINANCIAL INSTRUMENTS

As of June 30, 2010, we had derivative instruments in place related to a portion of our anticipated production through 2013 for a total of 44,872,376 MMbtu of natural gas and 1,731,769 Bbls of oil. These derivative instruments were comprised of commodity floors, collars and swaps, basis protection swaps and, related to natural gas marketing, physical sales and purchases.

The following table summarizes the line items and fair value amounts of our derivative instruments in the accompanying balance sheets.

			Fair Value
Derivatives instruments not designated as hedges (1)		Balance sheet line item	June 30, 2010			December 31, 2009
			(in thousands)
Derivative assets:	Current
	Commodity contracts
	Related to natural gas and oil sales	Fair value of derivatives	$	36,302		$	39,107
	Related to natural gas marketing	Fair value of derivatives		3,147			3,077
	Basis protection contracts
	Related to natural gas marketing	Fair value of derivatives		55			39
				39,504			42,223
	Non Current
	Commodity contracts
	Related to natural gas and oil sales	Fair value of derivatives		45,590			19,680
	Related to natural gas marketing	Fair value of derivatives		275			530
	Basis protection contracts
	Related to natural gas marketing	Fair value of derivatives		8			18
				45,873			20,228
Total derivative assets (2)			$	85,377		$	62,451


Derivative liabilities:	Current
	Commodity contracts
	Related to natural gas and oil sales	Fair value of derivatives	$	(1,726	)	$	(2,451	)
	Related to natural gas marketing	Fair value of derivatives		(2,602	)		(2,626	)
	Basis protection contracts
	Related to natural gas and oil sales	Fair value of derivatives		(14,362	)		(15,127	)
	Related to natural gas marketing	Fair value of derivatives		(1	)		(4	)
				(18,691	)		(20,208	)
	Non Current
	Commodity contracts
	Related to natural gas and oil sales	Fair value of derivatives		(1,570	)		(7,572	)
	Related to natural gas marketing	Fair value of derivatives		(233	)		(423	)
	Basis protection contracts
	Related to natural gas and oil sales	Fair value of derivatives		(36,235	)		(40,784	)
				(38,038	)		(48,779	)
Total derivative liabilities (3)			$	(56,729	)	$	(68,987	)

__________

(1)

As of June 30, 2010, and December 31, 2009, none of our derivative instruments were designated as hedges.

(2)

Includes derivative positions that have been designated to our affiliated partnerships; accordingly, our accompanying balance sheets include a corresponding payable to our affiliated partnerships of $21.1 million and $13.4 million as of June 30, 2010, and December 31, 2009, respectively, representing their proportionate share of the derivative assets.

(3)

Includes derivative positions that have been designated to our affiliated partnerships; accordingly, our accompanying balance sheets include a corresponding receivable from our affiliated partnerships of $18.2 million and $21 million as of June 30, 2010, and December 31, 2009, respectively, representing their proportionate share of the derivative liabilities.

Index

PETROLEUM DEVELOPMENT CORPORATION

(dba PDC Energy)

Notes to Condensed Consolidated Financial Statements

June 30, 2010

(unaudited, continued)

The following table summarizes the impact of our derivative instruments on our accompanying statements of operations for the three and six months ended June 30, 2010 and 2009.

	2010									2009
Statement of operations line items	Reclassification of Realized Gains (Losses) Included in Prior Periods Unrealized			Realized and Unrealized Gains (Losses) For the Current Period			Total			Reclassification of Realized Gains (Losses) Included in Prior Periods Unrealized			Realized and Unrealized Gains (Losses) For the Current Period			Total
	(in thousands)
Three months ended June 30,
Commodity price risk management gain (loss), net
Realized gains (losses)	$	7,503		$	390		$	7,893		$	25,699		$	(1,404	)	$	24,295
Unrealized gains (losses)		(7,503	)		11,867			4,364			(25,699	)		(21,880	)		(47,579	)
Total commodity price risk management gain (loss), net (1)	$	-		$	12,257		$	12,257		$	-		$	(23,284	)	$	(23,284	)
Sales from natural gas marketing
Realized gains (losses)	$	1,984		$	(179	)	$	1,805		$	2,055		$	68		$	2,123
Unrealized gains (losses)		(1,984	)		(580	)		(2,564	)		(2,055	)		99			(1,956	)
Total sales from natural gas marketing(2)	$	-		$	(759	)	$	(759	)	$	-		$	167		$	167
Cost of natural gas marketing
Realized gains (losses)	$	(1,747	)	$	138		$	(1,609	)	$	(1,996	)	$	(330	)	$	(2,326	)
Unrealized gains (losses)		1,747			664			2,411			1,996			(35	)		1,961
Total cost of natural gas marketing(2)	$	-		$	802		$	802		$	-		$	(365	)	$	(365	)


Six months ended June 30,
Commodity price risk management gain (loss), net
Realized gains (losses)	$	21,604		$	9,213		$	30,817		$	47,587		$	13,334		$	60,921
Unrealized gains (losses)		(21,604	)		46,266			24,662			(47,587	)		(12,935	)		(60,522	)
Total commodity price risk management gain (loss), net (1)	$	-		$	55,479		$	55,479		$	-		$	399		$	399
Sales from natural gas marketing
Realized gains (losses)	$	1,481		$	1,383		$	2,864		$	3,344		$	1,489		$	4,833
Unrealized gains (losses)		(1,481	)		2,429			948			(3,344	)		2,213			(1,131	)
Total sales from natural gas marketing(2)	$	-		$	3,812		$	3,812		$	-		$	3,702		$	3,702
Cost of natural gas marketing
Realized gains (losses)	$	(1,329	)	$	(1,376	)	$	(2,705	)	$	(3,148	)	$	(2,037	)	$	(5,185	)
Unrealized gains (losses)		1,329			(2,238	)		(909	)		3,148			(2,257	)		891
Total cost of natural gas marketing(2)	$	-		$	(3,614	)	$	(3,614	)	$	-		$	(4,294	)	$	(4,294	)

_________

(1)

Represents realized and unrealized gains and losses on derivative instruments related to natural gas and oil sales.

(2)

Represents realized and unrealized gains and losses on derivative instruments related to natural gas marketing.

Concentration of Credit Risk. A significant component of our future liquidity is concentrated in derivative instruments that enable us to manage a portion of our exposure to price volatility from producing natural gas and oil. These arrangements expose us to the risk of nonperformance by our counterparties. To date, we have had no counterparty defaults.

With regard to derivative assets, the following table presents the counterparties that expose us to credit risk as of June 30, 2010.

Counterparty Name	Fair Value of Derivative Assets June 30, 2010
	(in thousands)

JPMorgan Chase Bank, N.A. (1)	$	43,073
Calyon (1)		21,018
Wachovia (1)		12,004
Various (2)		9,282
Total	$	85,377

__________

(1)

Major lender in our credit facility, see Note 7.

(2)

Represents a total of 51counterparties, including four lenders in our credit facility.

Index

PETROLEUM DEVELOPMENT CORPORATION

(dba PDC Energy)

Notes to Condensed Consolidated Financial Statements

June 30, 2010

(unaudited, continued)

5.	PROPERTIES AND EQUIPMENT

The following table presents the components of properties and equipment, net.

	June 30, 2010			December 31, 2009
	(in thousands)
Natural gas and oil properties (successful efforts method of accounting)
Proved	$	1,256,530		$	1,281,529
Unproved		37,669			38,626
Total natural gas and oil properties		1,294,199			1,320,155
Pipelines and related facilities		33,395			36,909
Transportation and other equipment		31,064			33,432
Land and buildings		14,272			14,699
Construction in progress		34,760			9,131
		1,407,690			1,414,326
Accumulated DD&A		(468,770	)		(434,953	)

Properties and equipment, net (1)	$	938,920		$	979,373

__________

(1)

As a result of the deconsolidation of and our change in ownership interest in PDCM, properties and equipment were reduced by $67.1 million, net of accumulated depreciation, depletion and amortization ("DD&A") of $20.6 million, from December 31, 2009. See Notes 2 and 13.

The following table presents the capitalized exploratory well costs pending determination of proved reserves and included in properties and equipment on the balance sheets.

	Amount			Number of Wells
	(in thousands)

Balance at December 31, 2009	$	1,174			2
Deconsolidation of PDCM and change in ownership interest		(441	)		-
Additions to capitalized exploratory well costs pending the determination of proved reserves		9,874			5
Reclassifications to proved natural gas and oil properties based on the determination of proved reserves		(3,111	)		(1	)
Capitalized exploratory well costs charged to expense		(280	)		-
Balance at June 30, 2010	$	7,216			6

As of June 30, 2010, none of the six suspended wells awaiting the determination of proved reserves have been capitalized for a period greater than one year after the completion of drilling.

6.	INCOME TAXES

We evaluate our estimated annual effective income tax rate on a quarterly basis based on current and forecasted operating results and enacted tax laws. The estimated annual effective tax rate is adjusted quarterly based upon actual results and updated operating forecasts; consequently, based upon the mix and timing of our actual earnings compared to annual projections, our effective tax rate may vary quarterly. A tax expense or benefit unrelated to the current year ordinary income or loss is recognized in its entirety as a discrete item of tax in the period identified. The quarterly income tax provision is generally comprised of tax on ordinary income or tax benefit on ordinary loss at the most recent estimated annual effective tax rate, adjusted for the effect of discrete items.

Index

PETROLEUM DEVELOPMENT CORPORATION

(dba PDC Energy)

Notes to Condensed Consolidated Financial Statements

June 30, 2010

(unaudited, continued)

The effective tax rate for continuing operations for the three and six months ended June 30, 2010, was 36.8% (benefit on a loss) and 37.6% (provision on income) compared to benefits on losses of 38.3% and 38.8% for the same prior year periods, respectively. The loss realized for the three and six months ended June 30, 2009, exceeded our projected loss for the year. As a result, we calculated our 2009 three and six month tax benefits by multiplying the period loss by the statutory tax rate and then adding other statutory tax benefits such as percentage depletion. This required tax calculation did not limit the tax benefit for the 2009 three months ended June 30, 2009, but did limit the tax benefit realized during the six months then ended by $0.7 million. No similar limitation calculation was required for the three and six months ended June 30, 2010. There were no significant discrete items recorded during the three and six months ended June 30, 2009 or 2010.

As of June 30, 2010, we had a gross liability for uncertain tax benefits of $0.8 million compared to a liability of $0.6 million as of December 31, 2009. If recognized, $0.8 million of this liability would affect our effective tax rate. This liability is reflected in federal and state income taxes payable in our accompanying balance sheet. During the three months ended June 30, 2010, the Internal Revenue Service ("IRS") commenced an examination of our 2007, 2008 and 2009 tax years. Therefore, we expect the liability for uncertain tax benefits to decrease during the next twelve-month period as items are either resolved without change or converted to amounts due to the IRS.

We filed a refund request in May 2010 to reflect our federal 2009 net operating loss ("NOL") carry-back to our 2005 and 2006 tax years. We received our requested federal tax refund of approximately $25.9 million in June 2010. This refund reduced our income tax receivable balance that was recorded at December 31, 2009. Our 2009 NOL is carried forward for state tax purposes and the net benefit of $2.6 million is included as a deferred tax asset and netted against deferred tax liabilities on our balance sheet.

As of the date of this filing, we are current with our income tax filings in all applicable state jurisdictions and currently have no state income tax returns in the process of examination.

7.	LONG-TERM DEBT

The following table presents the components of long-term debt.

	June 30, 2010		December 31, 2009
	(in thousands)

Credit facility	$	37,000	$	80,000
12% Senior notes due 2018, net of discount of $2.2 million		200,802		200,657
Total long-term debt	$	237,802	$	280,657

Credit facility

We have a credit facility arranged by JPMorgan Chase Bank, N.A., dated as of November 4, 2005, as amended last on December 18, 2009 ("the Eighth Amendment"), with an aggregate revolving commitment of $305 million, which expires on May 22, 2012. The credit facility, through the series of amendments, includes commitments from eleven additional banks. The maximum allowable commitment under the credit facility is $500 million. The credit facility is guaranteed by PDC and its wholly owned subsidiaries, with the exception of certain immaterial subsidiaries, individually and in the aggregate; it is not guaranteed by PDCM. The subsidiary guarantees are full and unconditional and joint and several. The credit facility is subject to and collateralized by our natural gas and oil reserves, exclusive of PDCM's natural gas and oil reserves. The credit facility requires an aggregated security of a value no less than 80% of the value of the direct interests included in the borrowing base properties. Our credit facility borrowing base is subject to size redeterminations each May and November based upon a quantification of reserves at December 31st and June 30th, respectively; additionally, we or our lenders may request a redetermination upon the occurrence of certain events. A commodity price deck reflective of the current and future commodity pricing environment, as determined by our lenders, is utilized to quantify the reserves used in the borrowing base calculation and thus determines the underlying borrowing base. In May 2010, our redetermination, based on our December 31, 2009, reserves, was completed and our aggregate revolving commitment was unchanged.

We have an $18.7 million irrevocable standby letter of credit in favor of a third party transportation service provider. This letter of credit reduces the amount of available funds under our credit facility by an equal amount. We pay a fronting fee of 0.25% per annum and an additional quarterly maintenance fee equivalent to the spread over Eurodollar loans (2.25% as of June 30, 2010) for the period the letter of credit remains outstanding. The letter of credit expires on May 22, 2012.

Index

PETROLEUM DEVELOPMENT CORPORATION

(dba PDC Energy)

Notes to Condensed Consolidated Financial Statements

June 30, 2010

(unaudited, continued)

As of June 30, 2010, we had remaining $4.9 million in debt issuance costs being amortized at a rate of $0.7 million per quarter; the funds available under our credit facility were $249.3 million; and the interest on our borrowings, inclusive of our standby letter of credit, was accruing at a rate of 4.9% per annum. We were in compliance with all covenants at June 30, 2010, and expect to remain in compliance throughout the next year.

12% Senior Notes Due 2018

In February 2008, we issued 12% senior notes with a total principal amount of $203 million payable at maturity on February 15, 2018. Interest is payable in cash semi-annually in arrears on each February 15th and August 15th. The senior notes were issued at a discount, 98.572% of the principal amount. The original discount and the deferred note issuance costs are being amortized to interest expense over the term of the debt using the effective interest method. As of June 30, 2010, we had remaining $6.4 million in original discount and costs being amortized at a rate of $0.2 million per quarter. We were in compliance with all covenants as of June 30, 2010, and expect to remain in compliance throughout the next year.

PDCM Credit Facility

In April 2010, PDCM entered into a credit facility arranged by BNP Paribas ("BNP"), dated as of April 30, 2010, with an initial borrowing base of $10 million. The maximum allowable commitment under the credit facility is $100 million. PDCM is required to pay a commitment fee of 0.5% per annum on the unused portion of the activated credit facility. Based upon PDCM's discretion, interest accrues at either an alternative base rate ("ABR") or an adjusted LIBOR. The ABR is the greater of BNP's prime rate, the federal funds effective rate plus 0.5% or the adjusted LIBOR for a three month interest period plus 1%. ABR and adjusted LIBOR borrowings are assessed an additional margin based upon the outstanding balance as a percentage of the available balance. ABR borrowings are assessed an additional margin of 1.5% to 2.25%. Adjusted LIBOR borrowings are assessed an additional margin spread of 2.5% to 3.25%. Debt issuance costs are amortized using the effective interest rate method over the remaining term of the credit facility. As of June 30, 2010, the unamortized debt issuance costs were immaterial. No principal payments are required until the credit agreement expires on April 30, 2014, or in the event that the borrowing base would fall below the outstanding balance. The credit facility is subject to and collateralized by PDCM's natural gas and oil reserves. The credit facility borrowing base is subject to size redeterminations each May and November based upon a quantification of PDCM's reserves at December 31st and June 30th, respectively; further, either PDCM or the lenders may request a redetermination upon the occurrence of certain events. Pursuant to the interests of the joint venture, the credit facility will be utilized by PDCM for the exploration and development of its Appalachian assets.

The credit facility contains covenants customary for agreements of this type, including, but not limited to, limitations on PDCM's ability to: (a) incur additional indebtedness and guarantees, (b) create liens and other encumbrances on their assets, (c) consolidate, merge or sell assets, (d) pay dividends and other distributions, (e) make certain investments, loans and advances, (f) enter into sale/leaseback transactions, and (g) engage in hedging activities unless certain requirements are satisfied. The credit facility also requires PDCM to execute and deliver specified mortgages and other evidences of security and to deliver specified opinions of counsel and other evidences of title. Further, PDCM is required to comply with certain financial tests and maintain certain financial ratios, as defined by the credit facility, on a quarterly basis. The financial tests and ratios include requirements to: (a) maintain a minimum current ratio of 1.0 to 1.0, (b) not to exceed a debt to EBITDAX ratio of 3.5 to 1.0 and (c) maintain a minimum interest coverage ratio of 2.5 to 1.0.

As of June 30, 2010, there were no amounts outstanding related to this credit facility. Should borrowings occur, our financial statements would include our proportionate share of the liability, cost and expenses. As of June 30, 2010, PDCM was in compliance with all covenants.

Index

PETROLEUM DEVELOPMENT CORPORATION

(dba PDC Energy)

Notes to Condensed Consolidated Financial Statements

June 30, 2010

(unaudited, continued)

8.	ASSET RETIREMENT OBLIGATION

The following table presents the changes in carrying amounts of the asset retirement obligation associated with our working interest in natural gas and oil properties.

	Amount
	(in thousands)
Balance at December 31, 2009 (1)	$	29,564
Deconsolidation of PDCM and change in ownership interest		(6,239	)
Obligations incurred with development activities		786
Accretion expense		668
Obligations discharged with disposal of properties and asset retirements		(63	)
Balance at June 30, 2010		24,716
Less current portion		(250	)
Long-term portion (1)	$	24,466

_________

(1)

Includes $0.8 million as of December 31, 2009, and June 30, 2010, related to assets held for sale.

9.	COMMITMENTS AND CONTINGENCIES

Merger Agreements

In June 2010, PDC and a wholly owned subsidiary of PDC entered into a merger agreement with each of PDC 2004-A Limited Partnership, PDC 2004-B Limited Partnership, PDC 2004-C Limited Partnership and PDC 2004-D Limited Partnership. PDC serves as the managing general partner of each of these partnerships. Pursuant to each merger agreement, if the merger is approved by the holders of a majority of the limited partner units held by limited partners of that partnership not affiliated with PDC, as well as the satisfaction of other customary closing conditions, then PDC will acquire such partnership. If all four partnerships are acquired, PDC will pay an aggregate of approximately $36.4 million for the limited partnership units of these partnerships. On July 8 and July 14, 2010, we filed the preliminary proxy statements with the SEC and anticipate, upon clearance by the SEC, that the definitive proxy statements will be mailed to investors in September 2010. If the required approvals are received, we expect the mergers to be completed in the fourth quarter of 2010. Funding for these acquisitions is expected to be provided through the utilization of our credit facility.

Purchase and Sale Agreements

In May 2010, we entered into agreements with unaffiliated third parties, whereby it was our intent to acquire various producing assets located primarily in the Wolfberry oil trend in West Texas and sell our Michigan natural gas assets. These transactions were consummated on July 30, 2010; see Note 12 for additional information regarding this transaction.

Firm Transportation Agreements

We have entered into contracts that provide firm transportation, sales and processing charges on pipeline systems through which we transport or sell our natural gas and the natural gas of other companies, working interest owners and our affiliated partnerships. These contracts require us to pay these transportation and processing charges whether the required volumes are delivered or not. Satisfaction of the volumes requirements include volumes produced by us, volumes purchased from third parties and volumes produced by our affiliated partnerships. As of June 30, 2010, based on a review of our drilling plans and volume projections, we do not expect to meet all future volume requirements for a firm transportation agreement in our Piceance Basin. Accordingly, as of June 30, 2010, we have a related liability in the amount of $2.9 million, previously recorded in prior periods, included in other liabilities on the balance sheet. We are currently working with the third party to renegotiate the terms and timing of our volume requirements under this agreement. If we are not able to renegotiate this agreement or meet our expected future volumes, an additional liability may result.

Index

PETROLEUM DEVELOPMENT CORPORATION

(dba PDC Energy)

Notes to Condensed Consolidated Financial Statements

June 30, 2010

(unaudited, continued)

The following table presents gross volume information related to our long-term firm sales, processing and transportation agreements for pipeline capacity. We record in our financial statements only our share of costs incurred based upon our working and net revenue interest in the wells. If the volumes below are not met, we will bear all costs related to the volume shortfall.

			For the Twelve Months Ending June 30,
Area	Total		2011		2012		2013		2014		Thereafter		Expiration Date
Volume (MMbtu)
Appalachian Basin (1)		111,110,050		686,250		591,300		9,264,620		10,993,800		89,574,080	August 31, 2022
Piceance		208,195,158		31,933,342		32,612,837		32,576,935		28,181,550		82,890,494	May 31, 2021
NECO		920,000		920,000		-		-		-		-	December 31, 2010
NECO		11,875,000		1,825,000		1,825,000		1,825,000		1,825,000		4,575,000	December 31, 2016
Total		332,100,208		35,364,592		35,029,137		43,666,555		41,000,350		177,039,574

Dollar commitment (in thousands)	$	170,705	$	18,179	$	18,150	$	22,603	$	21,202	$	90,571

_____________

(1)

Includes a precedent agreement that becomes effective when the planned pipeline is placed in service, currently estimated to be September 2012 and represents 8,823,360 MMbtu, 10,628,800 MMbtu and 86,894,080 MMbtu of the total MMbtu presented for the twelve months ending June 30, 2013, 2014 and thereafter, respectively. This agreement will be null and void if the pipeline is not completed. In August 2009, we issued a letter of credit related to this agreement; see Note 7.

Litigation

We are involved in various legal proceedings that we consider normal to our business. Although the results cannot be known with certainty, we believe that we have properly accrued reserves.

Royalty Owner Class Action

Gobel et al v. Petroleum Development Corporation, Case No. 09-C-40 in U. S. District Court, Northern District of West Virginia, filed on January 27, 2009

David W. Gobel, individually and as representative of the class of all similarly situated individuals and entities, filed a lawsuit against the Company alleging that we failed to properly pay royalties (the "Gobel lawsuit"). The allegations state that the Company improperly deducted certain charges and costs before applying the royalty percentage. Punitive damages are requested in addition to breach of contract, tort, and fraud allegations. The stay in effect as of December 31, 2009, lapsed in February 2010. The parties have filed briefs on Gobel's Motion to Remand to state court. We are awaiting a ruling from the court on that motion.

We are involved in various other legal proceedings that we consider normal to our business. Although the results cannot be known with certainty, we believe that the ultimate results of such proceedings will not have a material adverse effect on our financial position, results of operations or liquidity.

Environmental

Due to the nature of the natural gas and oil business, we are exposed to environmental risks. We have various policies and procedures to avoid environmental contamination and mitigate the risks from environmental contamination. We conduct periodic reviews to identify changes in our environmental risk profile. Liabilities are accrued when environmental assessments and/or clean-ups are probable and the costs can be reasonably estimated. As of June 30, 2010, we have accrued environmental liabilities in the amount of $1.1 million included in other accrued liabilities on the balance sheet. We are not aware of any environmental claims existing as of June 30, 2010, which have not been provided for or would otherwise have a material impact on our financial statements. However, there can be no assurance that current regulatory requirements will not change or unknown past non-compliance with environmental laws will not be discovered on our properties.

In July 2008, the Company self-reported to the Colorado Department of Public Health and Environment (the "CDPHE") certain non-compliance with air laws at a compressor station in the Piceance Basin. The CDPHE subsequently initiated a review and inspection of air compliance at this station. In November and December 2009, the Company received related compliance advisories for alleged non-compliance. On May 27, 2010, we entered into a settlement agreement providing for a civil penalty of $162,900, which was accrued in prior periods and paid at settlement.

Index

PETROLEUM DEVELOPMENT CORPORATION

(dba PDC Energy)

Notes to Condensed Consolidated Financial Statements

June 30, 2010

(unaudited, continued)

In December 2008, we received a Notice of Violation/Cease and Desist Order (the "Notice") from the CDPHE, related to the stormwater permit for the Garden Gulch Road. The Company manages this private road for Garden Gulch LLC. The Company is one of eight users of this road, all of which are natural gas and oil companies operating in the Piceance region of Colorado. Operating expenses, including this fine, if any, are allocated among the users of the road based upon their respective usage. The Notice alleges a deficient and/or incomplete stormwater management plan, failure to implement best management practices and failure to conduct required permit inspections. The Notice requires corrective action and states that the recipient shall cease and desist such alleged violations. The Notice states that a violation could result in civil penalties up to $10,000 per day. The Company’s responses were submitted on February 6, 2009, and April 8, 2009. Commencing in December 2009, the Company entered negotiations with the CDPHE regarding this notice and continues to work to bring this matter to closure. Given the inherent uncertainty in administrative actions of this nature, the Company is unable to predict the ultimate outcome of this administrative action at this time.

Partnership Repurchase Provision

Substantially all of our drilling programs contain a repurchase provision where investing partners may request that we purchase their partnership units at any time beginning with the third anniversary of the first cash distribution. The provision provides that we are obligated to purchase an aggregate of 10% of the initial subscriptions per calendar year (at a minimum price of four times the most recent 12 months' cash distributions from production), if repurchase is requested by investors, subject to our financial ability to do so. As of June 30, 2010, the maximum annual repurchase obligation, based upon the minimum price described above, was approximately $11.4 million. We believe we have adequate liquidity to meet this obligation. During the first two quarters of 2010, the repurchases of partnership units pursuant to this provision were immaterial.

Employment Agreements with Executive Officers

We have employment agreements with our Chief Executive Officer, Chief Financial Officer and other executive officers. The employment agreements provide for annual base salaries, eligibility for performance bonus compensation and other various benefits, including retirement and termination benefits.

In the event of termination following a change of control of the Company, or where the Company terminates the executive officer without cause or where an executive officer terminates employment for good reason, the severance benefits range from two times to three times the sum of the executive's highest annual base salary during the previous two years of employment immediately preceding the termination date and the executive's highest annual bonus paid or payable during the same two year period. For one executive, in this calculation, the target bonus will be used as the minimum value for the first two years of employment. For this purpose, a "change of control" and "good reason" correspond to the respective definitions of "change of control" and "good reason" under Section 409A of the Internal Revenue Code of 1986 (IRC) and the supporting treasury regulations, with some differences. The executive officer is also entitled to (i) vesting of any unvested equity compensation (excluding all long-term performance shares), (ii) reimbursement for any unpaid expenses, (iii) retirement benefits earned under the current and/or previous agreements, (iv) continued coverage under our medical plan for up to 18 months, and (v) payment of any earned and unpaid bonus amounts. In addition, the executive officer is entitled to receive any benefits that he would have otherwise been entitled to receive under our 401(k) and profit sharing plan, although those benefits are not increased or accelerated.

In the event that an executive officer is terminated for just cause, we are required to pay the executive officer his base salary through the termination date plus a partial year bonus, incentive, deferred, retirement or other compensation, and to provide any other benefits, which have been earned or become payable as of the termination date.

In the event that an executive officer voluntarily terminates his employment for other than good reason, he is entitled to receive (i) his base salary and bonus, provided, however, that with respect to the bonus, for certain executive officers, there shall be no proration of the bonus if such executive leaves prior to the last day of the year and, with respect to the remaining executive officers, there shall be no proration of the bonus in the event such executive officer leaves prior to March 31 in the year of his termination, (ii) any incentive, deferred or other compensation which has been earned or has become payable, but which has not yet been paid under the schedule originally contemplated in the agreement under which they were granted, (iii) any unpaid expense reimbursement upon presentation by the executive officer of an accounting of such expenses in accordance with our normal practices, and (iv) any other payments for benefits earned under the employment agreement or our plans.

In the event of death or disability, the executive is entitled to receive certain benefits. For this purpose, the definition of "disability" corresponds to the definition under IRC 409A and the supporting treasury regulations. The benefits shall (i) in the case of death be equal to the base salary that would otherwise have been paid for a six-month period following the termination date and (ii) in the case of disability be up to thirteen weeks of ongoing base salary plus a lump sum equal to six months base salary.

Index

PETROLEUM DEVELOPMENT CORPORATION

(dba PDC Energy)

Notes to Condensed Consolidated Financial Statements

June 30, 2010

(unaudited, continued)

Derivative Contracts

We are exposed to the effect of market fluctuations in the prices of natural gas and oil. To manage the risks associated with these market fluctuations, we utilize derivative instruments. Should the counterparties to our derivative instruments not perform, our exposure to market fluctuations in commodity prices would increase significantly. We have had no counterparty defaults.

Partnership Casualty Losses

As managing general partner of 33 partnerships, we have liability for potential casualty losses in excess of the partnership assets and insurance. We believe the casualty insurance coverage that we and our subcontractors carry is adequate to meet this potential liability.

10.	STOCK-BASED COMPENSATION PLANS

2010 Long-Term Equity Compensation Plan

In June 2010, our shareholders approved a long-term equity compensation plan for our employees and non-employee directors (the "2010 Plan"). In accordance with the 2010 Plan, up to 1,400,000 new shares of our common stock are authorized for issuance. Shares issued may be either authorized but unissued shares, treasury shares or any combination of these shares. Additionally, the 2010 Plan permits the reuse or reissuance of shares of common stock which were cancelled, expired, forfeited or, in the case of stock appreciation rights ("SARs"), paid out in the form of cash. Awards may be issued to our employees in the form of stock options, SARs, restricted stock, restricted stock units ("RSUs"), performance shares and performance units and to our non-employee directors in the form of non-qualified stock options, SARs, restricted stock and RSUs. Awards may vest over periods set at the discretion of the Compensation Committee of our Board of Directors (the "Compensation Committee") with certain minimum vesting periods. With regard to options and SARs, awards have a maximum exercisable period of ten years. In no event may an award be granted under the 2010 Plan on or after April 1, 2020. As of June 30, 2010, 8,603 shares of restricted stock had been awarded pursuant to the 2010 Plan. Subsequent to June 30, 2010, pursuant to the 2010 Plan, the Compensation Committee awarded to key employees 173,058 shares of restricted stock with a total aggregate fair market value of $4.4 million, which will be expensed over a weighted average vesting period of 3.2 years.

Other Long-Term Equity Compensation Plans

As of June 30, 2010, 2,134 shares remain available in our 2004 Long-Term Equity Compensation Plan and five shares remain available in our 2005 Non-Employee Director Restricted Stock Plan. All outstanding and non-vested awards pursuant to these plans will continue to be outstanding and vest pursuant to their original terms.

The following table provides a summary of the impact of our stock-based compensation plans on the results of operations for the periods presented.

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2010			2009 (1)			2010			2009 (2)
	(in thousands)

Total stock-based compensation expense	$	1,216		$	2,345		$	2,221		$	3,984
Income tax benefit		(467	)		(895	)		(852	)		(1,520	)
Net income impact	$	749		$	1,450		$	1,369		$	2,464

__________

(1)

Includes $1 million related to agreements with a former chief executive officer and executive vice president.

(2)

Includes $1.3 million related to agreements with a former chief executive officer and executive vice president.

Index

PETROLEUM DEVELOPMENT CORPORATION

(dba PDC Energy)

Notes to Condensed Consolidated Financial Statements

June 30, 2010

(unaudited, continued)

Stock-Based Compensation Awards

There have been no material changes in our stock options or market-based restricted stock awards during the six months ended June 30, 2010.

SARs. In April 2010, our Compensation Committee granted SARs to our executive officers. The SARs will vest over a three-year period and may be exercised at any point after vesting through April 2020. Pursuant to the terms of the awards, upon exercise, the executives will receive in shares of common stock the excess of the market price of the award on the date of exercise over the market price of the award on the date of issuance.

The fair value of each SAR award was estimated on the date of grant using a Black-Scholes pricing model using the assumptions presented in the table below. The expected life of the award was estimated using historical stock option exercise behavior data. The risk-free interest rate was based on the U.S. Treasury yields approximating the expected life of the award in effect at the time of grant. Expected volatilities were based on our historical volatility. We do not expect to pay dividends, nor do we expect to declare dividends in the foreseeable future.

	Six Months Ended
	June 30, 2010

Weighted average value per SAR granted during the period:	$	13.26
Assumptions:
Expected term	5 years
Risk-free interest rate		2.5	%
Volatility		62.0	%

The following table presents the changes in our SARs for the six months ended June 30, 2010.

	Number of Shares Underlying SARS		Grant Date Market Price Per Share		Average Remaining Contractual Term (in years)		Aggregate Intrinsic Value (in thousands)

Outstanding at December 31, 2009		-	$	-		-	$	-
Awarded		57,282		24.44		9.8		-
Outstanding at June 30, 2010		57,282		24.44		9.8		68
Vested and expected to vest at June 30, 2010		57,282		24.44		9.8		68
Exercisable at June 30, 2010		-		-		-		-

The total compensation cost related to SARs granted and not yet recognized in our statement of operations as of June 30, 2010, was $0.7 million. The cost is expected to be recognized over a weighted average period of 2.8 years.

Index

PETROLEUM DEVELOPMENT CORPORATION

(dba PDC Energy)

Notes to Condensed Consolidated Financial Statements

June 30, 2010

(unaudited, continued)

Restricted Stock Awards. During the three months ended June 30, 2010, our Compensation Committee granted a total of 148,327 shares of restricted stock to our executive officers and non-employee directors. Pursuant to the terms of the awards, the shares will vest over a period of one to three years.

The following table presents the changes in our non-vested time-based awards for the six months ended June 30, 2010.

	Shares			Weighted Average Grant Date Fair Value

Non-vested at December 31, 2009		305,328		$	27.55
Granted		148,327			23.30
Vested		(58,930	)		35.18
Forfeited		(10,488	)		33.39
Non-vested at June 30, 2010		384,237			24.58

The total compensation cost related to non-vested time-based awards expected to vest and not yet recognized in our statements of operations as of June 30, 2010, was $7.5 million. The cost is expected to be recognized over a weighted average period of 2.2 years.

11.	EARNINGS PER SHARE

The following is a reconciliation of the weighted average diluted shares outstanding.

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2010		2009		2010		2009
	(in thousands)

Weighted average common shares outstanding - basic		19,213		14,811		19,202		14,802
Dilutive effect of stock-based compensation:
Restricted stock		-		-		86		-
Non employee director deferred compensation		-		-		8		-
Weighted average common shares outstanding - diluted		19,213		14,811		19,296		14,802

For the three months ended June 30, 2010, and three and six months ended June 30, 2009, the weighted average common shares outstanding for both basic and diluted were the same because the effect of dilutive securities was anti-dilutive due to our net loss for the periods. The following table sets forth the weighted average common share equivalents excluded from the calculation of diluted earnings per share due to their anti-dilutive effect.

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2010		2009		2010		2009
	(in thousands)
Weighted average common share equivalents excluded from diluted earnings per share due to their anti-dilutive effect:
Restricted stock		434		286		181		297
Stock options		10		10		10		10
SARs		57		-		57		-
Non employee director deferred compensation		8		8		-		8
Total anti-dilutive common share equivalents		509		304		248		315

Index

PETROLEUM DEVELOPMENT CORPORATION

(dba PDC Energy)

Notes to Condensed Consolidated Financial Statements

June 30, 2010

(unaudited, continued)

12.	ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS

Michigan Divestiture. In May 2010, pursuant to a sale agreement with unaffiliated third parties, we reclassified our Michigan assets and related liabilities as held for sale. On July 30, 2010, we completed the divestiture for $22.5 million in net cash proceeds and realized a loss on sale of $4.5 million in the form of an impairment charge recorded during the three months ended June 30, 2010 (see Note 3 regarding the impairment charge). The sale involved our Michigan asset group. We will not have any significant continuing involvement in the operations of or cash flows from this asset group. Accordingly, the results of operations related to the Michigan assets have been separately reported as discontinued operations for all periods presented.

In conjunction with the sale agreement, we entered into a like-kind exchange agreement, in accordance with Internal Revenue Code Section 1031 ("IRC 1031"), with a qualified intermediary. Proceeds in the amount of $20.6 million were transferred directly to the qualified intermediary to be held in trust and were used to complete on July 30, 2010, our acquisition of various producing assets located in the Wolfberry oil trend in West Texas, which was identified as our replacement property in accordance with IRC 1031. The gain for income tax purposes on the divested properties was $18.9 million. With the favorable deferral aspects of IRC 1031, we were able to defer the associated tax liability of $7.2 million.

Natural Gas and Oil Well Drilling. We offered our last sponsored drilling partnership in October 2007. As of June 30, 2009, all remaining contractual drilling and completion obligations were completed for all partnerships and we reported our natural gas and oil well drilling activities as discontinued operations.

Selected financial information related to assets held for sale and discontinued operation. The tables below sets forth selected financial and operational information related to assets held for sale, assets and liabilities related to discontinued operations and operating results related to discontinued operations. Assets held for sale including related liabilities present the assets that were sold and liabilities that were assumed pursuant to the sale agreement. Assets and liabilities related to discontinued operations include those assets sold and liabilities assumed as well as all other related assets and liabilities, consisting of accounts receivable and production tax liability, which were not sold. While the reclassification of revenues and expenses related to discontinued operations for prior periods had no impact upon previously reported net earnings, the statement of operations and operational tables presents the revenues, expenses and production volumes that were reclassified from the specified statement of operations line items to discontinued operations.

	June 30, 2010				December 31, 2009
Balance Sheet	Assets Held for Sale including Related Liabilities (1)		Assets and Liabilities Related to Discontinued Operations		Assets Held for Sale including Related Liabilities (1)		Assets and Liabilities Related to Discontinued Operations
	(in thousands)
Assets
Current assets
Accounts receivable, net	$	-	$	1,067	$	-	$	1,240
Total current assets		-		1,067		-		1,240
Properties and equipment, net		23,293		23,293		28,820		28,820
Total assets	$	23,293	$	24,360	$	28,820	$	30,060

Liabilities
Current liabilities
Production tax liability	$	-	$	-	$	-	$	37
Total current liabilities		-		-		-		37
Asset retirement obligation		808		808		775		775
Total liabilities	$	808	$	808	$	775	$	812

Index

PETROLEUM DEVELOPMENT CORPORATION

(dba PDC Energy)

Notes to Condensed Consolidated Financial Statements

June 30, 2010

(unaudited, continued)

	Three Months Ended					Six Months Ended
	June 30,					June 30,
Statement of Operations - Discontinued Operations	2010			2009		2010			2009 (2)
	(in thousands)
Revenues
Natural gas and oil sales	$	1,323		$	1,156	$	3,029		$	2,731
Sales from natural gas marketing		1,136			1,061		2,760			2,618
Well operations, pipeline income and other		127			176		371			352
Total revenues		2,586			2,393		6,160			5,701

Costs, expenses and other
Natural gas and oil production and well operations costs		483			367		1,012			868
Cost of natural gas marketing		1,197			1,096		2,728			2,628
Depreciation, depletion and amortization		361			601		1,094			1,075
Impairment of proved natural gas and oil properties		4,506			-		4,506			-
Total costs, expenses and other		6,547			2,064		9,340			4,571

Income (loss) from discontinued operations		(3,961	)		329		(3,180	)		1,130
Provision (benefit) for income taxes		(1,556	)		126		(1,263	)		456
Income (loss) from discontinued operations, net of tax	$	(2,405	)	$	203	$	(1,917	)	$	674

Operational Data

Production
Natural gas (Mcf)		344,205			366,119		700,912			651,936
Oil (Bbls)		1,015			755		2,099			1,578
Natural gas equivalent (Mcfe)		350,295			370,649		713,504			661,404

_____________

(1)

See Note 8 for additional information regarding the asset retirement obligation related to assets held for sale.

(2)

Represents only the impact of the divestiture of our Michigan assets; excludes revenues of $193 thousand ($113 thousand, net of tax) related to our natural gas and oil well drilling segment, which was reported as discontinued operations in June 2009.