Edgar Filing: PDC ENERGY, INC.

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

T QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2016

£ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to _________

Commission File Number 001-37419

PDC ENERGY, INC.

(Exact name of registrant as specified in its charter)



Delaware	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 Website, 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 x No o

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 definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.



Large accelerated filer x	Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)	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: 56,266,147 shares of the Company's Common Stock ($0.01 par value) were outstanding as of October 17, 2016.

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PDC ENERGY, INC.

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	PART I – FINANCIAL INFORMATION	Page

Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets (unaudited)	1
	Condensed Consolidated Statements of Operations (unaudited)	2
	Condensed Consolidated Statements of Cash Flows (unaudited)	3
	Condensed Consolidated Statements of Equity (unaudited)	4
	Notes to Condensed Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	40
Item 4.	Controls and Procedures	42

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	42
Item 1A.	Risk Factors	42
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 3.	Defaults Upon Senior Securities	43
Item 4.	Mine Safety Disclosures	43
Item 5.	Other Information	43
Item 6.	Exhibits	44

	SIGNATURES	45

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q 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" within the meaning of the safe harbor provisions of the United States ("U.S.") Private Securities Litigation Reform Act of 1995. 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. These statements relate to, among other things: the closing of pending transactions and the effects of such transactions, including the fact that the pending Delaware Basin acquisition is subject to continuing diligence between the parties and accordingly, may not occur within the expected timeframe or at all; estimated future production (including the components of such production), sales, expenses, cash flows, liquidity and balance sheet attributes; estimated crude oil, natural gas and natural gas liquids (“NGLs”) reserves; the impact of prolonged depressed commodity prices, including potentially reduced production and associated cash flow; anticipated capital projects, expenditures and opportunities; expected capital budget allocations; our operational flexibility and ability to revise our development plan, either upward or downward; availability of sufficient funding and liquidity for our capital program and sources of that funding; expected positive net settlements on derivatives for the remainder of 2016; that we expect quarter-over-quarter production growth; future exploration, drilling and development activities, including non-operated activity, the number of drilling rigs we expect to run and lateral lengths of wells, including the number of rigs we expect to run in 2017 in the Delaware Basin; expected 2016 production and cash flow ranges and timing of turn-in-lines; our evaluation method of our customers' and derivative counterparties' credit risk; effectiveness of our derivative program in providing a degree of price stability; potential for future impairments; expected sustained relief of gathering system pressure; compliance with debt covenants; impact of litigation on our results of operations and financial position; that we do not expect to pay dividends in the foreseeable future; and our future strategies, plans and objectives.

The above statements 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. Forward-looking statements are always subject to risks and uncertainties, and become subject to greater levels of risk and uncertainty as they address matters further into the future. Throughout this report or accompanying materials, we may use the terms “projection” or similar terms or expressions, or indicate that we have “modeled” certain future scenarios. We typically use these terms to indicate our current thoughts on possible outcomes relating to our business or the industry in periods beyond the current fiscal year. Because such statements relate to events or conditions further in the future, they are subject to increased levels of uncertainty.

Important factors that could cause actual results to differ materially from the forward-looking statements include, but are not limited to:


•	changes in worldwide production volumes and demand, including economic conditions that might impact demand;


•	volatility of commodity prices for crude oil, natural gas and NGLs and the risk of an extended period of depressed prices;


•	reductions in the borrowing base under our revolving credit facility;


•	impact of governmental policies and/or regulations, including changes in environmental and other laws, the interpretation and enforcement related to those laws and regulations, liabilities arising thereunder and the costs to comply with those laws and regulations;


•	declines in the value of our crude oil, natural gas and NGLs properties resulting in further impairments;


•	changes in estimates of proved reserves;


•	inaccuracy of reserve estimates and expected production rates;


•	potential for production decline rates from our wells being greater than expected;


•	timing and extent of our success in discovering, acquiring, developing and producing reserves;


•	availability of sufficient pipeline, gathering and other transportation facilities and related infrastructure to process and transport our production and the impact of these facilities and regional capacity on the prices we receive for our production;


•	timing and receipt of necessary regulatory permits;


•	risks incidental to the drilling and operation of crude oil and natural gas wells;


•	future cash flows, liquidity and financial condition;


•	competition within the oil and gas industry;


•	availability and cost of capital;


•	our success in marketing crude oil, natural gas and NGLs;


•	effect of crude oil and natural gas derivatives activities;


•	impact of environmental events, governmental and other third-party responses to such events, and our ability to insure adequately against such events;


•	cost of pending or future litigation;


•	effect that acquisitions we may pursue have on our capital expenditures;


•	our ability to retain or attract senior management and key technical employees; and


•	success of strategic plans, expectations and objectives for our future operations.

Further, we urge you to carefully review and consider the cautionary statements and disclosures, specifically those under the heading "Risk Factors," made in this Quarterly Report on Form 10-Q, our Annual Report on Form 10-K for the year ended December 31, 2015 (the "2015 Form 10-K"), filed with the U.S. Securities and Exchange Commission ("SEC") on February 22, 2016, and our other filings with the SEC for further information on risks and uncertainties that could affect our business, financial condition, results of operations and prospects, which

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are incorporated by this reference as though fully set forth herein. We caution you not to place undue reliance on the forward-looking statements, which speak only as of the date of this report. 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. All forward-looking statements are qualified in their entirety by this cautionary statement.

REFERENCES

Unless the context otherwise requires, references in this report to "PDC Energy," "PDC," "the Company," "we," "us," "our" or "ours" refer to the registrant, PDC Energy, Inc. and all subsidiaries consolidated for the purposes of its financial statements, including our proportionate share of the financial position, results of operations, cash flows and operating activities of our affiliated partnerships. See Note 1, Nature of Operations and Basis of Presentation, to our condensed consolidated financial statements included elsewhere in this report for a description of our consolidated subsidiaries.

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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PDC ENERGY, INC.

Condensed Consolidated Balance Sheets

(unaudited; in thousands, except share and per share data)



	September 30, 2016			December 31, 2015
Assets
Current assets:
Cash and cash equivalents	$	1,197,692		$	850
Accounts receivable, net	99,895			104,274
Fair value of derivatives	65,604			221,659
Prepaid expenses and other current assets	4,854			5,266
Total current assets	1,368,045			332,049
Properties and equipment, net	1,932,274			1,940,552
Fair value of derivatives	8,423			44,387
Other assets	108,538			53,555
Total Assets	$	3,417,280		$	2,370,543

Liabilities and Shareholders' Equity
Liabilities
Current liabilities:
Accounts payable	$	62,350		$	92,613
Production tax liability	22,141			26,524
Fair value of derivatives	22,563			1,595
Funds held for distribution	51,107			29,894
Current portion of long-term debt	—			112,940
Accrued interest payable	19,364			9,057
Other accrued expenses	41,756			28,709
Total current liabilities	219,281			301,332
Long-term debt	1,041,575			529,437
Deferred income taxes	44,340			143,452
Asset retirement obligation	82,509			84,032
Fair value of derivatives	17,885			695
Other liabilities	25,630			24,398
Total liabilities	1,431,220			1,083,346

Commitments and contingent liabilities

Shareholders' equity
Preferred shares - par value $0.01 per share, 50,000,000 shares authorized, none issued	—			—
Common shares - par value $0.01 per share, 150,000,000 authorized, 56,280,544 and 40,174,776 issued as of September 30, 2016 and December 31, 2015, respectively	563			402
Additional paid-in capital	1,796,664			907,382
Retained earnings	190,133			380,422
Treasury shares - at cost, 25,854 and 20,220 as of September 30, 2016 and December 31, 2015, respectively	(1,300		)	(1,009		)
Total shareholders' equity	1,986,060			1,287,197
Total Liabilities and Shareholders' Equity	$	3,417,280		$	2,370,543

See accompanying Notes to Condensed Consolidated Financial Statements

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PDC ENERGY, INC.

Condensed Consolidated Statements of Operations

(unaudited; in thousands, except per share data)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Revenues
Crude oil, natural gas and NGLs sales	$	141,805		$	104,483		$	328,013		$	275,520
Sales from natural gas marketing	2,678			2,580			6,728			8,336
Commodity price risk management gain (loss), net	19,397			123,549			(62,348		)	141,170
Well operations, pipeline income and other	10			488			2,425			1,666
Total revenues	163,890			231,100			274,818			426,692
Costs, expenses and other
Lease operating expenses	14,001			13,825			43,006			42,749
Production taxes	9,568			5,476			19,682			13,206
Transportation, gathering and processing expenses	5,048			3,938			13,554			6,584
Cost of natural gas marketing	3,092			2,781			7,795			8,875
Exploration expense	241			252			688			812
Impairment of properties and equipment	933			154,031			6,104			161,207
General and administrative expense	32,510			20,277			78,868			62,050
Depreciation, depletion and amortization	112,927			80,947			317,329			206,873
Provision for uncollectible notes receivable	(700		)	—			44,038			—
Accretion of asset retirement obligations	1,777			1,594			5,400			4,742
Gain on sale of properties and equipment	(219		)	(74		)	(43		)	(302		)
Total cost, expenses and other	179,178			283,047			536,421			506,796
Loss from operations	(15,288		)	(51,947		)	(261,603		)	(80,104		)
Interest expense	(20,193		)	(12,092		)	(42,759		)	(35,384		)
Interest income	140			1,378			1,875			3,626
Loss before income taxes	(35,341		)	(62,661		)	(302,487		)	(111,862		)
Provision for income taxes	12,032			21,167			112,198			40,560
Net loss	$	(23,309	)	$	(41,494	)	$	(190,289	)	$	(71,302	)

Earnings per share:
Basic	$	(0.48	)	$	(1.04	)	$	(4.16	)	$	(1.84	)
Diluted	$	(0.48	)	$	(1.04	)	$	(4.16	)	$	(1.84	)

Weighted-average common shares outstanding:
Basic	48,839			40,085			45,741			38,837
Diluted	48,839			40,085			45,741			38,837

See accompanying Notes to Condensed Consolidated Financial Statements

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PDC ENERGY, INC.

Condensed Consolidated Statements of Cash Flows

(unaudited; in thousands)



	Nine Months Ended September 30,
	2016			2015
Cash flows from operating activities:
Net loss	$	(190,289	)	$	(71,302	)
Adjustments to net loss to reconcile to net cash from operating activities:
Net change in fair value of unsettled derivatives	230,177			21,322
Depreciation, depletion and amortization	317,329			206,873
Provision for uncollectible notes receivable	44,038			—
Impairment of properties and equipment	6,104			161,207
Accretion of asset retirement obligation	5,400			4,742
Stock-based compensation	15,205			14,278
Gain on sale of properties and equipment	(43		)	(302		)
Amortization of debt discount and issuance costs	12,951			5,308
Deferred income taxes	(114,136		)	(44,770		)
Non-cash interest income	(1,194		)	(3,624		)
Other	668			(174		)
Changes in assets and liabilities	34,621			(10,552		)
Net cash from operating activities	360,831			283,006
Cash flows from investing activities:
Capital expenditures	(353,722		)	(489,036		)
Acquisition of crude oil and natural gas properties	(100,000		)	—
Proceeds from sale of properties and equipment	4,945			319
Net cash from investing activities	(448,777		)	(488,717		)
Cash flows from financing activities:
Proceeds from sale of equity, net of issuance cost	855,072			202,851
Proceeds from senior notes	392,250			—
Proceeds from convertible senior notes	193,979			—
Proceeds from revolving credit facility	85,000			325,000
Repayment of revolving credit facility	(122,000		)	(331,000		)
Redemption of convertible notes	(115,000		)	—
Other	(4,513		)	(3,516		)
Net cash from financing activities	1,284,788			193,335
Net change in cash and cash equivalents	1,196,842			(12,376		)
Cash and cash equivalents, beginning of period	850			16,066
Cash and cash equivalents, end of period	$	1,197,692		$	3,690

Supplemental cash flow information:
Cash payments for:
Interest, net of capitalized interest	$	22,975		$	23,467
Income taxes	167			9,936
Non-cash investing and financing activities:
Change in accounts payable related to purchases of properties and equipment	$	(31,497	)	$	(68,529	)
Change in asset retirement obligation, with a corresponding change to crude oil and natural gas properties, net of disposals	1,137			1,642
Purchase of properties and equipment under capital leases	1,231			1,479

See accompanying Notes to Condensed Consolidated Financial Statements

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PDC ENERGY, INC.

Condensed Consolidated Statements of Equity

(unaudited; in thousands, except share and per share data)



Nine Months Ended September 30,	2016			2015
Common shares, issued:
Shares beginning of period	40,174,776			35,927,985
Shares issued pursuant to sale of equity	15,799,906			4,002,000
Exercise of stock options	46,084			—
Issuance of stock awards, net of forfeitures	259,778			191,623
Shares end of period	56,280,544			40,121,608
Treasury shares:
Shares beginning of period	20,220			21,643
Purchase of treasury shares	90,695			93,898
Issuance of treasury shares	(91,895		)	(97,995		)
Non-employee directors' deferred compensation plan	6,834			4,872
Shares end of period	25,854			22,418
Common shares outstanding	56,254,690			40,099,190

Equity:
Shareholders' equity
Preferred shares, par value $0.01 per share:
Balance beginning and end of period	$	—		$	—
Common shares, par value $0.01 per share:
Balance beginning of period	402			359
Shares issued pursuant to sale of equity and note conversion	158			40
Issuance of stock awards, net of forfeitures	3			2
Balance end of period	563			401
Additional paid-in capital:
Balance beginning of period	907,383			689,209
Convertible debt discount, net of issuance costs and tax	23,264			—
Proceeds from sale of equity, net of issuance costs	854,932			202,811
Stock-based compensation expense	15,202			14,419
Issuance of treasury shares	(5,180		)	(4,633		)
Tax impact of stock-based compensation	1,063			1,232
Balance end of period	1,796,664			903,038
Retained earnings:
Balance beginning of period	380,422			448,702
Net loss	(190,289		)	(71,302		)
Balance end of period	190,133			377,400
Treasury shares, at cost:
Balance beginning of period	(1,009		)	(911		)
Purchase of treasury shares	(5,106		)	(4,575		)
Issuance of treasury shares	5,179			4,632
Non-employee directors' deferred compensation plan	(364		)	(249		)
Balance end of period	(1,300		)	(1,103		)
Total shareholders' equity	$	1,986,060		$	1,279,736

See accompanying Notes to Condensed Consolidated Financial Statements

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PDC ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

(unaudited)

NOTE 1 - NATURE OF OPERATIONS AND BASIS OF PRESENTATION

PDC Energy, Inc. (the "Company," "we," "us," or "our") is a domestic independent exploration and production company that produces, develops, acquires and explores for crude oil, natural gas and NGLs, with primary operations in the Wattenberg Field in Colorado and the Utica Shale in southeastern Ohio. Our operations in the Wattenberg Field are focused in the horizontal Niobrara and Codell plays and our Ohio operations are focused in the Utica Shale play. In addition, we currently have a pending acquisition in the Delaware Basin in Texas. See Note 6, Pending Acquisition. As of September 30, 2016, we owned an interest in approximately 3,000 gross wells. We are engaged in two business segments: Oil and Gas Exploration and Production and Gas Marketing.

The accompanying unaudited condensed consolidated financial statements include the accounts of PDC, our wholly-owned subsidiary Riley Natural Gas ("RNG") and our proportionate share of our four affiliated partnerships. Pursuant to the proportionate consolidation method, our accompanying condensed consolidated financial statements include our pro rata share of assets, liabilities, revenues and expenses of the entities which we proportionately consolidate. All material intercompany accounts and transactions have been eliminated in consolidation.

In our opinion, the accompanying condensed consolidated financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary for a fair statement 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 December 31, 2015 condensed consolidated balance sheet data was derived from audited statements, but does not include all disclosures required by U.S. GAAP. 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 2015 Form 10-K. Our results of operations and cash flows for the three and nine months ended September 30, 2016 are not necessarily indicative of the results to be expected for the full year or any other future period.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board ("FASB") and the International Accounting Standards Board issued their converged standard on revenue recognition that provides a single, comprehensive model that entities will apply to determine the measurement of revenue and timing of when it is recognized. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. The standard outlines a five-step approach to apply the underlying principle: (1) identify the contract with the customer, (2) identify the separate performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to separate performance obligations and (5) recognize revenue when (or as) each performance obligation is satisfied. In March 2016, the FASB issued an update to the standard intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations when recognizing revenue. The revenue standard is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. The revenue standard can be adopted under the full retrospective method or simplified transition method. Entities are permitted to adopt the revenue standard early, beginning with annual reporting periods after December 15, 2016. We are currently evaluating the impact these changes may have on our condensed consolidated financial statements.

In August 2014, the FASB issued a new standard related to the disclosure of uncertainties about an entity's ability to continue as a going concern. The new standard requires management to assess an entity's ability to continue as a going concern at the end of every reporting period and to provide related footnote disclosures in certain circumstances. The new standard will be effective for all entities in the first annual period ending after December 15, 2016, with early adoption permitted. We expect to adopt this standard in the fourth quarter of 2016. Adoption of this standard is not expected to have a significant impact on our condensed consolidated financial statements.

In February 2016, the FASB issued an accounting update aimed at increasing the transparency and comparability among organizations by recognizing lease assets and liabilities on the balance sheet and disclosing key information about related leasing arrangements. For leases with terms of more than 12 months, the accounting update requires lessees to recognize an asset for its right to use the underlying asset and a lease liability for the corresponding lease obligation. Both the lease asset and liability will initially be measured at the present value of the future minimum lease payments over the lease term. Subsequent measurement, including the presentation of expenses and cash flows, will depend upon the classification of the lease as either a finance or operating lease. The guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those years, with early adoption permitted, and is to be applied as of the beginning of the earliest period presented using a modified retrospective approach. We are currently evaluating the impact these changes may have on our condensed consolidated financial statements.

In March 2016, the FASB issued an accounting update on stock-based compensation intended to simplify several aspects of the accounting for employee share-based payment award transactions. Areas of simplification include income tax consequences, classification of the awards as either equity or liabilities and the classification on the statement of cash flows. The guidance is effective for fiscal years beginning

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PDC ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

(unaudited)

after December 15, 2016, and interim periods within those years, with early adoption permitted. We expect to adopt this standard in the fourth quarter of 2016. Adoption of this standard is not expected to have a significant impact on our condensed consolidated financial statements.

In August 2016, the FASB issued an accounting update on statements of cash flows to address diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. We are currently evaluating the impact these changes may have on our condensed consolidated financial statements.

NOTE 3 - FAIR VALUE OF FINANCIAL INSTRUMENTS

Determination of Fair Value

Our fair value measurements are estimated pursuant to a fair value hierarchy that requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date, giving the highest priority to quoted prices in active markets (Level 1) and the lowest priority to unobservable data (Level 3). In some cases, the inputs used to measure fair value might fall in different levels of the fair value hierarchy. The lowest level input that is significant to a fair value measurement in its entirety determines the applicable level in the fair value hierarchy. Assessing the significance of a particular input to the fair value measurement in its entirety requires judgment, considering factors specific to the asset or liability, and may affect the valuation of the assets and liabilities and their placement within the fair value hierarchy levels. The three levels of inputs that may be used to measure fair value are defined as:

Level 1 – Quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2 – Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable for the asset or liability, including quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, inputs other than quoted prices that are observable for the asset or liability and inputs that are derived from observable market data by correlation or other means.

Level 3 – Unobservable inputs for the asset or liability, including situations where there is little, if any, market activity.

Derivative Financial Instruments

We measure the fair value of our derivative instruments based upon a pricing model that utilizes market-based inputs, including, but not limited to, the contractual price of the underlying position, current market prices, crude oil and natural gas forward curves, discount rates such as the LIBOR curve for a similar duration of each outstanding position, volatility factors and nonperformance risk. Nonperformance risk considers the effect of our credit standing on the fair value of derivative liabilities and the effect of our counterparties' credit standings on the fair value of derivative assets. Both inputs to the model are based on published credit default swap rates and the duration of each outstanding derivative position.

We validate our fair value measurement through the review of counterparty statements and other supporting documentation, the determination that the source of the inputs is valid, the corroboration of the original source of inputs through access to multiple quotes, if available, or other information and monitoring changes in valuation methods and assumptions. While we use common industry practices to develop our valuation techniques and believe our valuation method is appropriate and consistent with those used by other market participants, changes in our pricing methodologies or the underlying assumptions could result in significantly different fair values.

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PDC ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

(unaudited)

Our fixed-price swaps, basis swaps and physical purchases are included in Level 2 and our collars and physical sales are included in Level 3. The following table presents, for each applicable level within the fair value hierarchy, our derivative assets and liabilities, including both current and non-current portions, measured at fair value on a recurring basis:



	September 30, 2016						December 31, 2015
	Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
	(in thousands)
Assets:
Commodity-based derivative contracts	$	49,021	$	24,582	$	73,603	$	174,657	$	91,288	$	265,945
Basis protection derivative contracts	424		—		424		101		—		101
Total assets	49,445		24,582		74,027		174,758		91,288		266,046
Liabilities:
Commodity-based derivative contracts	30,917		8,650		39,567		738		—		738
Basis protection derivative contracts	881		—		881		1,552		—		1,552
Total liabilities	31,798		8,650		40,448		2,290		—		2,290
Net asset	$	17,647	$	15,932	$	33,579	$	172,468	$	91,288	$	263,756

The following table presents a reconciliation of our Level 3 assets measured at fair value:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
	(in thousands)
Fair value, net asset beginning of period	$	27,285		$	58,256		$	91,288		$	62,356
Changes in fair value included in condensed consolidated statement of operations line item:
Commodity price risk management gain (loss), net	4,234			38,085			(16,023		)	42,525
Sales from natural gas marketing	—			51			(20		)	51
Settlements included in statement of operations line items:
Commodity price risk management gain (loss), net	(15,587		)	(12,530		)	(59,243		)	(21,063		)
Sales from natural gas marketing	—			—			(70		)	(7		)
Fair value, net asset end of period	$	15,932		$	83,862		$	15,932		$	83,862

Net change in fair value of unsettled derivatives included in condensed consolidated statement of operations line item:
Commodity price risk management gain (loss), net	$	(2,240	)	$	34,564		$	(8,273	)	$	31,794

The significant unobservable input used in the fair value measurement of our derivative contracts is the implied volatility curve, which is provided by a third-party vendor. A significant increase or decrease in the implied volatility, in isolation, would have a directionally similar effect resulting in a significantly higher or lower fair value measurement of our Level 3 derivative contracts. There has been no change in the methodology we apply to measure the fair value of our Level 3 derivative contracts during the periods covered by this report.

Non-Derivative Financial Assets and Liabilities

The carrying value of the financial instruments included in current assets and current liabilities approximate fair value due to the short-term maturities of these instruments.

We utilize fair value on a nonrecurring basis to review our crude oil and natural gas properties for possible impairment when events and circumstances indicate a possible decline in the recoverability of the carrying value of such properties. The fair value of the properties is determined based upon estimated future discounted cash flow, a Level 3 input, using estimated production and prices at which we reasonably expect the crude oil and natural gas will be sold.

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PDC ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

(unaudited)

The liability associated with our non-qualified deferred compensation plan for non-employee directors may be settled in cash or shares of our common stock. The carrying value of this obligation is based on the quoted market price of our common stock, which is a Level 1 input. The liability related to this plan, which was included in other liabilities on the condensed consolidated balance sheets, was immaterial as of September 30, 2016 and December 31, 2015.

The portion of our long-term debt related to our revolving credit facility approximates fair value due to the variable nature of related interest rates. We have not elected to account for the portion of our debt related to our senior notes under the fair value option; however, as of September 30, 2016, we estimate the fair value of the portion of our long-term debt related to our 1.125% senior notes due 2021 to be $214.8 million, or 107.4% of par value, 6.125% senior notes due 2024 to be $415.6 million, or 103.9% of par value, and 7.75% senior notes due 2022 to be $530.3 million, or 106.1% of par value. We determined these valuations based upon measurements of trading activity and broker and/or dealer quotes, respectively, which are published market prices, and therefore are Level 2 inputs.

The carrying value of our capital lease obligations approximates fair value due to the variable nature of the imputed interest rates and the duration of the related vehicle lease.

Concentration of Risk

Derivative Counterparties. Our derivative arrangements expose us to credit risk of nonperformance by our counterparties. We primarily use financial institutions who are also lenders under our revolving credit facility as counterparties to our derivative contracts. To date, we have had no counterparty default losses relating to our derivative arrangements. We have evaluated the credit risk of our derivative assets from our counterparties 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, we have determined that the potential impact of nonperformance of our counterparties on the fair value of our derivative instruments was not significant at September 30, 2016, taking into account the estimated likelihood of nonperformance.

The following table presents the counterparties that expose us to credit risk as of September 30, 2016 with regard to our derivative assets:



Counterparty Name	Fair Value of Derivative Assets
	(in thousands)
Canadian Imperial Bank of Commerce (1)	$	21,343
JP Morgan Chase Bank, N.A (1)	17,929
Bank of Nova Scotia (1)	15,166
Wells Fargo Bank, N.A. (1)	9,891
NATIXIS (1)	7,171
Other lenders in our revolving credit facility	2,491
Various (2)	36
Total	$	74,027

__________

(1)Major lender in our revolving credit facility. See Note 8, Long-Term Debt.

(2)Represents a total of two counterparties.

Cash and Cash Equivalents. We consider all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents potentially subject us to a concentration of credit risk as substantially all of our deposits held in financial institutions were in excess of the FDIC insurance limits at September 30, 2016. We maintain our cash and cash equivalents in the form of money market and checking accounts with financial institutions that we believe are creditworthy.

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PDC ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

(unaudited)

Notes Receivable. The following table presents information regarding a note receivable outstanding as of September 30, 2016:



	Amount
	(in thousands)
Note receivable:
Principal outstanding, December 31, 2015	$	43,069
Paid-in-kind interest	969
Principal outstanding, September 30, 2016	44,038
Allowance for uncollectible notes receivable	(44,038		)
Note receivable, net	$	—

In October 2014, we sold our entire 50% ownership interest in PDCM to an unrelated third-party. As part of the consideration, we received a promissory note (the “Note”) for a principal sum of $39 million, bearing interest at varying rates beginning at 8%, and increasing annually. Pursuant to the Note agreement, interest is payable quarterly, in arrears, commencing in December 2014 and continuing on the last business day of each fiscal quarter thereafter. At the option of the issuer of the Note, an unrelated third-party, interest can be paid-in-kind (the “PIK Interest”) and any such PIK Interest will be added to the outstanding principal amount of the Note. As of September 30, 2016, the issuer of the Note had elected the PIK Interest option. The principal and any unpaid interest is due and payable in full in September 2020 and can be prepaid in whole or in part at any time without premium or penalty. If an event of default occurs under the Note agreement, the Note must be repaid prior to maturity. Legally, the Note is secured by a pledge of stock in certain subsidiaries of the unrelated third-party, debt securities and other assets; however, we believe that collection of the Note is not reasonably assured.

On a quarterly basis, we examine the Note for evidence of impairment, evaluating factors such as the creditworthiness of the issuer of the Note and the value of the underlying assets that secure the Note. We performed our quarterly evaluation and cash flow analysis as of March 31, 2016 and, based upon the unaudited year-end financial statements and reserve report of the issuer of the Note received by us in late March 2016 and existing market conditions, determined that collection of the Note and PIK Interest was not reasonably assured. As a result, we recognized a provision and recorded an allowance for uncollectible notes receivable for the $44 million outstanding balance as of March 31, 2016, which was included in the condensed consolidated balance sheet line item other assets. As of September 30, 2016, there has been no change to our assessment of the collectibility of the note or related interest since March 31, 2016. Commencing in the second quarter of 2016, we ceased recognizing interest income on the Note and are accounting for the Note under the cash basis method.

Under the effective interest method, we recognized $1.2 million of interest income related to the Note for the three months ended March 31, 2016, of which $1 million was PIK Interest, and we recognized $1.1 million and $3.4 million of interest income related to the Note for the three and nine months ended September 30, 2015, respectively, of which $0.8 million and $2.4 million, respectively, was PIK Interest.

Additionally, during the three months ended March 31, 2016, we recorded a $0.7 million provision and allowance for uncollectible notes receivable to impair a promissory note related to a previous divestiture as collection of the promissory note was not reasonably assured based on the analysis we performed as of March 31, 2016. In August 2016, we collected the $0.7 million promissory note and reversed the related provision and allowance for uncollectible notes receivable during the three months ended September 30, 2016.

NOTE 4 - DERIVATIVE FINANCIAL INSTRUMENTS

Our results of operations and operating cash flows are affected by changes in market prices for crude oil, natural gas and NGLs. To manage a portion of our exposure to price volatility from producing crude oil and natural gas, we utilize the following economic hedging strategies for each of our business segments.


•	For crude oil and natural gas sales, we enter into derivative contracts to protect against price declines in future periods. While we structure these derivatives to reduce our exposure to changes in price associated with the derivative commodity, they also limit the benefit we might otherwise have received from price increases in the physical market; and


•	For natural gas marketing, we enter into fixed-price physical purchase and sale agreements that qualify as derivative contracts. In order to offset the fixed-price physical derivatives in our natural gas marketing, we enter into financial derivative instruments that have the effect of locking in the prices we will receive or pay for the same volumes and period, offsetting the physical derivative.

We believe our derivative instruments continue to be effective in achieving the risk management objectives for which they were intended. As of September 30, 2016, we had derivative instruments, which were comprised of collars, fixed-price swaps, basis protection swaps and physical sales and purchases, in place for a portion of our anticipated production through 2018 for a total of 90,425 BBtu of natural gas and

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PDC ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

(unaudited)

8,857 MBbls of crude oil. The majority of our derivative contracts are entered into at no cost to us as we hedge our anticipated production at the then-prevailing commodity market prices.

We have not elected to designate any of our derivative instruments as hedges, and therefore do not qualify for use of hedge accounting. Accordingly, changes in the fair value of our derivative instruments are recorded in the statements of operations. Changes in the fair value of derivative instruments related to our Oil and Gas Exploration and Production segment are recorded in commodity price risk management, net. Changes in the fair value of derivative instruments related to our Gas Marketing segment are recorded in sales from and cost of natural gas marketing.

The following table presents the balance sheet location and fair value amounts of our derivative instruments on the condensed consolidated balance sheets:



			Fair Value
Derivative instruments:		Condensed Consolidated Balance sheet line item	September 30, 2016		December 31, 2015
			(in thousands)
Derivative assets:	Current
	Commodity contracts
	Related to crude oil and natural gas sales	Fair value of derivatives	$	65,191	$	221,161
	Related to natural gas marketing	Fair value of derivatives	270		441
	Basis protection contracts
	Related to crude oil and natural gas sales	Fair value of derivatives	143		57
			65,604		221,659
	Non-current
	Commodity contracts
	Related to crude oil and natural gas sales	Fair value of derivatives	8,122		44,292
	Related to natural gas marketing	Fair value of derivatives	20		51
	Basis protection contracts
	Related to crude oil and natural gas sales	Fair value of derivatives	281		44
			8,423		44,387
Total derivative assets			$	74,027	$	266,046

Derivative liabilities:	Current
	Commodity contracts
	Related to crude oil and natural gas sales	Fair value of derivatives	$	21,639	$	—
	Related to natural gas marketing	Fair value of derivatives	221		417
	Basis protection contracts
	Related to crude oil and natural gas sales	Fair value of derivatives	703		1,178
			22,563		1,595
	Non-current
	Commodity contracts
	Related to crude oil and natural gas sales	Fair value of derivatives	17,698		275
	Related to natural gas marketing	Fair value of derivatives	9		46
	Basis protection contracts
	Related to crude oil and natural gas sales	Fair value of derivatives	178		374
			17,885		695
Total derivative liabilities			$	40,448	$	2,290

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PDC ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

(unaudited)

The following table presents the impact of our derivative instruments on our condensed consolidated statements of operations:



	Three Months Ended September 30,						Nine Months Ended September 30,
Condensed consolidated statement of operations line item	2016			2015			2016			2015
	(in thousands)
Commodity price risk management gain (loss), net
Net settlements	$	47,728		$	67,993		$	167,859		$	162,454
Net change in fair value of unsettled derivatives	(28,331		)	55,556			(230,207		)	(21,284		)
Total commodity price risk management gain (loss), net	$	19,397		$	123,549		$	(62,348	)	$	141,170
Sales from natural gas marketing
Net settlements	$	122		$	165		$	420		$	561
Net change in fair value of unsettled derivatives	255			(5		)	(263		)	(298		)
Total sales from natural gas marketing	$	377		$	160		$	157		$	263
Cost of natural gas marketing
Net settlements	$	(103	)	$	(157	)	$	(380	)	$	(531	)
Net change in fair value of unsettled derivatives	(277		)	(5		)	293			260
Total cost of natural gas marketing	$	(380	)	$	(162	)	$	(87	)	$	(271	)

All of our financial derivative agreements contain master netting provisions that provide for the net settlement of all contracts through a single payment in the event of early termination. Our fixed-price physical purchase and sale agreements that qualify as derivative contracts are not subject to master netting provisions and are not significant. We have elected not to offset the fair value positions recorded on our condensed consolidated balance sheets.

The following table reflects the impact of netting agreements on gross derivative assets and liabilities:



As of September 30, 2016	Derivative instruments, recorded in condensed consolidated balance sheet, gross		Effect of master netting agreements			Derivative instruments, net
	(in thousands)
Asset derivatives:
Derivative instruments, at fair value	$	74,027	$	(22,520	)	$	51,507

Liability derivatives:
Derivative instruments, at fair value	$	40,448	$	(22,520	)	$	17,928



As of December 31, 2015	Derivative instruments, recorded in condensed consolidated balance sheet, gross		Effect of master netting agreements			Derivative instruments, net
	(in thousands)
Asset derivatives:
Derivative instruments, at fair value	$	266,046	$	(1,921	)	$	264,125

Liability derivatives:
Derivative instruments, at fair value	$	2,290	$	(1,921	)	$	369

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PDC ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

(unaudited)

NOTE 5 - PROPERTIES AND EQUIPMENT

The following table presents the components of properties and equipment, net of accumulated depreciation, depletion and amortization ("DD&A"):



	September 30, 2016			December 31, 2015
	(in thousands)
Properties and equipment, net:
Crude oil and natural gas properties
Proved	$	3,183,772		$	2,881,189
Unproved	61,838			60,498
Total crude oil and natural gas properties	3,245,610			2,941,687
Equipment and other	31,410			30,098
Land and buildings	10,900			12,667
Construction in progress	107,794			113,115
Properties and equipment, at cost	3,395,714			3,097,567
Accumulated DD&A	(1,463,440		)	(1,157,015		)
Properties and equipment, net	$	1,932,274		$	1,940,552

In September 2016, we closed on an acreage exchange transaction with Noble Energy, Inc. and certain of its subsidiaries ("Noble") to consolidate certain acreage positions in the core area of the Wattenberg Field. Pursuant to the transaction, we exchanged leasehold acreage and, to a lesser extent, interests in certain development wells. Upon closing, we received approximately 13,500 net acres in exchange for approximately 11,700 net acres, with no cash exchanged between the parties.

The following table presents impairment charges recorded for crude oil and natural gas properties:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
	(in thousands)

Impairment of proved and unproved properties	$	338	$	150,840	$	2,391	$	152,764
Amortization of individually insignificant unproved properties	595		3,191		681		8,443
Impairment of crude oil and natural gas properties	933		154,031		3,072		161,207
Land and buildings	—		—		3,032		—
Impairment of properties and equipment	$	933	$	154,031	$	6,104	$	161,207

NOTE 6 - PENDING ACQUISITION

In August 2016, we entered into acquisition agreements to purchase Arris Petroleum Corporation (“Arris”) and the assets of 299 Resources, LLC, 299 Production, LLC and 299 Pipeline, LLC (collectively, “299 Sellers”) pursuant to which, and subject to the terms and conditions of those agreements, we have agreed to acquire an aggregate of approximately 57,000 net acres, approximately 30 wells and other related midstream infrastructure in Reeves and Culberson Counties, Texas, for an aggregate consideration to Arris and 299 Sellers of approximately $915 million in cash and approximately 9.4 million shares of our common stock (valued at approximately $590 million at the time the acquisition agreements were executed), subject to certain adjustments, and ongoing due diligence (the "Delaware Basin Acquisition"). The acquisition agreements allow the sellers to include a specified amount of additional leases in the transaction, which would increase the purchase price. Upon executing the acquisition agreements, we paid a $100 million deposit toward the cash portion of the purchase price into an escrow account, which is included in other assets in our September 30, 2016 condensed consolidated balance sheet. In some circumstances set forth in the acquisition agreements, we could be required to forfeit the $100 million deposit. The acquisition is expected to close in December 2016; however, there can be no assurance that conditions to closing will be satisfied.

In order to fund the cash portion of the Delaware Basin Acquisition, we completed a public offering of shares of our common stock, a public offering of convertible senior notes and a private offering of senior notes in September 2016. See Note 8, Long-Term Debt, and Note 12, Common Stock, for further information. Prior to the September 2016 issuances of common stock, convertible senior notes and senior notes, we entered into a commitment letter with JPMorgan Chase Bank, N.A. (“JPMorgan”), for short-term bridge financing of the Delaware Basin Acquisition. The commitment letter contemplated, among other things, (i) a senior unsecured bridge loan to us in an aggregate principal amount not to exceed $600 million, to be drawn, if at all, at the closing of the Delaware Basin Acquisition, (ii) a $250 million increase in the commitments under our existing revolving credit facility and (iii) certain related proposed amendments and waivers to our existing credit facility agreement. Upon issuance of the common stock, convertible senior notes and senior notes, the bridge loan commitment was terminated. Upon closing of

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PDC ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

(unaudited)

the Delaware Basin Acquisition, we will be required to pay approximately $9 million in fees related to the bridge loan commitment, approximately $6 million in fees related to the increase in commitments under the revolving credit facility and approximately $10 million in other direct acquisition-related costs. During the three months ended September 30, 2016, we recorded charges for the bridge loan fees and the other direct acquisition-related costs. The $9 million charge for fees related to the bridge loan commitment is included in interest expense and the $10 million charge for other direct acquisition-related costs is included in general and administrative expenses. The liabilities associated with both amounts are included in other accrued expenses on our condensed consolidated balance sheet as of September 30, 2016.

NOTE 7 - INCOME TAXES

We evaluate and update our estimated annual effective income tax rate on a quarterly basis based on current and forecasted operating results and tax laws. Consequently, based upon the mix and timing of our actual earnings compared to annual projections, our effective tax rate may vary quarterly and may make quarterly comparisons not meaningful. A tax expense or benefit unrelated to the current year 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 expense on income or benefit on loss at the most recent estimated annual effective tax rate, adjusted for the effect of discrete items.

The effective tax rate for the three and nine months ended September 30, 2016 was a 34.0% and 37.1% benefit on loss compared to a 33.8% and 36.3% benefit on loss for the three and nine months ended September 30, 2015. The effective tax rate for the three and nine months ended September 30, 2016 is based upon a full year forecasted tax benefit on loss and is greater than the statutory federal tax rate, primarily due to state taxes, partially offset by nondeductible officers’ compensation and nondeductible lobbying expenses. The effective tax rate for the three and nine months ended September 30, 2015 differs from the statutory rate primarily due to state taxes and percentage depletion, partially offset by nondeductible officers' compensation. There were no significant discrete tax items recorded during the three and nine months ended September 30, 2016 or September 30, 2015.

As of September 30, 2016, there is no liability for unrecognized tax benefits. As of the date of this report, we are current with our income tax filings in all applicable state jurisdictions and are not currently under any state income tax examinations. We continue to voluntarily participate in the Internal Revenue Service's ("IRS") Compliance Assurance Program ("CAP") for the 2015 and 2016 tax years. With respect to the 2014 tax year, we have agreed to a post filing adjustment with the IRS which resulted in an immaterial tax payment for the 2014 tax year. The IRS has fully accepted the 2014 federal return, as adjusted. The IRS has partially accepted our recently filed 2015 return that is now going through the IRS CAP post-filing review process.

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PDC ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

(unaudited)

NOTE 8 - LONG-TERM DEBT

Long-term debt consisted of the following as of:



	September 30, 2016			December 31, 2015
	(in thousands)
Senior notes:
1.125% Convertible senior notes due 2021:
Principal amount	$	200,000		$	—
Unamortized discount	(39,199		)	—
Unamortized debt issuance costs	(4,793		)	—
1.125% Convertible senior notes due 2021, net of unamortized discount and debt issuance costs	156,008			—

6.125% Senior notes due 2024:
Principal amount	400,000			—
Unamortized debt issuance costs	(7,710		)	—
6.125% Senior notes due 2024, net of unamortized debt issuance costs	392,290			—

7.75% Senior notes due 2022:
Principal amount	500,000			500,000
Unamortized debt issuance costs	(6,723		)	(7,563		)
7.75% Senior notes due 2022, net of unamortized debt issuance costs	493,277			492,437

3.25% Convertible senior notes due 2016:
Principal amount	—			115,000
Unamortized discount	—			(1,852		)
Unamortized debt issuance costs	—			(208		)
3.25% Convertible senior notes due 2016, net of unamortized discount and debt issuance costs	—			112,940
Total senior notes	1,041,575			605,377

Revolving credit facility	—			37,000
Total debt, net of unamortized discount and debt issuance costs	1,041,575			642,377
Less current portion of long-term debt	—			112,940
Long-term debt	$	1,041,575		$	529,437

Senior Notes

1.125% Convertible Senior Notes Due 2021. In September 2016, we issued $200 million of 1.125% convertible senior notes due 2021 (the "2021 Convertible Notes") in a public offering. The 2021 Convertible Notes are governed by an indenture dated September 14, 2016 between us and the U.S. Bank National Association, as trustee. The maturity for the payment of principal is September 15, 2021. Interest at the rate of 1.125% per year is payable in cash semiannually in arrears on each March 15 and September 15, commencing on March 15, 2017. The 2021 Convertible Notes are senior unsecured obligations and rank senior in right of payment to our future indebtedness that is expressly subordinated to the 2021 Convertible Notes; equal in right of payment to our existing and future indebtedness that is not so subordinated; effectively junior in right of payment to all of our secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all existing and future indebtedness (including trade payables) incurred by our non-guarantor subsidiaries. The proceeds from the issuance of the 2021 Convertible Notes, after deducting offering expenses and underwriting discounts, are expected to be used to fund a portion of the purchase price of the Delaware Basin Acquisition (see Note 6, Pending Acquisition), to pay related fees and expenses and for general corporate purposes.

The 2021 Convertible Notes are convertible prior to March 15, 2021 only upon specified events and during specified periods and, thereafter, at any time, in each case at an initial conversion rate of 11.7113 per $1,000 principal amount of the 2021 Convertible Notes, which is equal to an initial conversion price of approximately $85.39 per share. The conversion rate is subject to adjustment upon certain events. Upon

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PDC ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

(unaudited)

conversion, the 2021 Convertible Notes may be settled, at our election, in shares of our common stock, cash or a combination of cash and shares of our common stock. We have initially elected a combination settlement method to satisfy our conversion obligation, which allows us to settle the principal amount of the 2021 Convertible Notes in cash and to settle the excess conversion value, if any, in shares, as well as cash in lieu of fractional shares.

We may not redeem the 2021 Convertible Notes prior to their maturity date. If we undergo a fundamental change, as defined in the indenture for the 2021 Convertible Notes, subject to certain conditions, holders of the 2021 Convertible Notes may require us to repurchase all or part of the 2021 Convertible Notes for cash at a price equal to 100% of the principal amount of the 2021 Convertible Notes to be repurchased, plus any accrued and unpaid interest to, but excluding, the fundamental change repurchase date. The occurrence of a fundamental change will also result in the 2021 Convertible Notes becoming convertible.

We allocated the gross proceeds of the 2021 Convertible Notes between the liability and equity components of the debt. The initial $160.5 million million liability component was determined based on the fair value of similar debt instruments excluding the conversion feature for similar terms and priced on the same day we issued the 2021 Convertible Notes. The initial $39.5 million equity component represents the debt discount and was calculated as the difference between the fair value of the debt and the gross proceeds of the 2021 Convertible Notes. Approximately $4.8 million in costs associated with the issuance of the 2021 Convertible Notes have been capitalized as debt issuance costs and are being amortized as interest expense over the life of the notes using the effective interest method. As of September 30, 2016, the unamortized debt discount will be amortized over the remaining contractual term to maturity of the 2021 Convertible Notes using an effective interest rate of 5.8%. Based upon a September 30, 2016 stock price of $67.06 per share, the “if-converted” value of the 2021 Convertible Notes did not exceed the principal amount.

6.125% Senior Notes Due 2024. In September 2016, we issued $400 million aggregate principal amount of 6.125% senior notes due September 15, 2024 (the “2024 Senior Notes”) in a private placement. The proceeds from the issuance of the 2024 Senior Notes, after deducting offering expenses and underwriting discounts, are expected to be used to fund a portion of the purchase price of the Delaware Basin Acquisition (see Note 6, Pending Acquisition), to pay related fees and expenses and for general corporate purposes. If the acquisition is not completed on or prior to December 31, 2016 (or in some circumstances by or on January 15, 2017), the 2024 Senior Notes will be redeemed in whole at a special mandatory redemption price equal to 100% of the aggregate principal amount of the 2024 notes, plus accrued and unpaid interest.

The 2024 Senior Notes accrue interest from the date of issuance and interest is payable semi-annually in arrears on March 15 and September 15, commencing on March 15, 2017. Approximately $7.8 million in costs associated with the issuance of the 2024 Senior Notes have been capitalized as debt issuance costs and are being amortized as interest expense over the life of the notes using the effective interest method. The 2024 Senior Notes are senior unsecured obligations and rank senior in right of payment to our future indebtedness that is expressly subordinated to the notes; equal in right of payment to all our existing and future indebtedness that is not so subordinated; effectively junior in right of payment to all of our secured indebtedness to the extent of the value of the collateral securing such indebtedness, including borrowings under our revolving credit facility; and structurally junior to all existing and future indebtedness (including trade payables) incurred by our non-guarantor subsidiaries.

In connection with the issuance of the 2024 Senior Notes, we entered into a registration rights agreement with the initial purchasers in which we agreed to file a registration statement with the SEC relating to an offer to exchange the 2024 Senior Notes for registered notes with substantially identical terms. In addition, we have agreed, in certain circumstances, to file a shelf registration statement covering the resale of the 2024 Senior Notes by holders.

At any time prior to September 15, 2019, we may redeem up to 35% of the outstanding 2024 Senior Notes with proceeds from certain equity offerings at a redemption price of 106.125% of the principal amount of the notes redeemed, plus accrued and unpaid interest, if at least 65% of the aggregate principal amount of the 2024 Senior Notes remains outstanding after each such redemption and the redemption occurs within 180 days after the closing of the equity offering.

Upon the occurrence of a "change of control," as defined in the indenture for the 2024 Senior Notes, holders will have the right to require us to repurchase all or a portion of the notes at a price equal to 101% of the aggregate principal amount of the notes repurchased, together with any accrued and unpaid interest to the date of purchase. In connection with certain asset sales, we may, under certain circumstances, be required to use the net cash proceeds of such asset sale to make an offer to purchase the notes at 100% of the principal amount, together with any accrued and unpaid interest to the date of purchase.

The indenture governing the 2024 Senior Notes contains covenants that, among other things, limit our ability and the ability of our subsidiaries to incur additional indebtedness; pay dividends or make distributions on our stock; purchase or redeem stock or subordinated indebtedness; make investments; create certain liens; enter into agreements that restrict distributions or other payments by restricted subsidiaries to us; enter into transactions with affiliates; sell assets; consolidate or merge with or into other companies or transfer all or substantially of our assets; and create unrestricted subsidiaries.

7.75% Senior Notes Due 2022. In October 2012, we issued $500 million aggregate principal amount of 7.75% senior notes due October 15, 2022 (the “2022 Senior Notes”) in a private placement. The 2022 Senior Notes accrue interest from the date of issuance and interest

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PDC ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

(unaudited)

is payable semi-annually in arrears on April 15 and October 15. The indenture governing the 2022 Senior Notes contains customary restrictive incurrence covenants, and customary repurchase and redemption provisions, generally similar to those in the indenture governing the 2024 Senior Notes. Capitalized debt issuance costs are being amortized as interest expense over the life of the 2022 Senior Notes using the effective interest method.

3.25% Convertible Senior Notes Due 2016. In November 2010, we issued $115 million aggregate principal amount of 3.25% convertible senior notes due 2016 (the "2016 Convertible Notes") in a private placement. The maturity for the payment of principal was May 15, 2016. At December 31, 2015, our indebtedness included the 2016 Convertible Notes. Upon settlement in May 2016, we paid the aggregate principal amount of the 2016 Convertible Notes, plus cash for fractional shares, totaling approximately 115 million, utilizing proceeds from our March 2016 equity offering. Additionally, we issued 792,406 shares of common stock for the $47.9 million excess conversion value. See Note 12, Common Stock, for more information.

As of September 30, 2016, we were in compliance with all covenants related to the 2021 Convertible Notes, 2024 Senior Notes and 2022 Senior Notes and expect to remain in compliance throughout the next 12-month period.

Credit Facility

Revolving Credit Facility. We are party to a Third Amended and Restated Credit Agreement with JPMorgan Chase Bank, N.A. as administrative agent, and other lenders party thereto (sometimes referred to as the "revolving credit facility"). The revolving credit facility matures in May 2020 and is available for working capital requirements, capital expenditures, acquisitions, general corporate purposes and to support letters of credit. The revolving credit facility provides for a maximum of $1 billion in allowable borrowing capacity, subject to the borrowing base, which is currently $700 million, and the aggregate commitments, which are currently $450 million. The borrowing base is based on, among other things, the loan value assigned to the proved reserves attributable to our crude oil and natural gas interests, excluding proved reserves attributable to our affiliated partnerships. The borrowing base is subject to a semi-annual size redetermination based upon quantification of our reserves at June 30 and December 31, and is also subject to a redetermination upon the occurrence of certain events. The revolving credit facility is secured by substantially all of our assets, including mortgages of producing crude oil and natural gas properties. Our affiliated partnerships are not guarantors of our obligations under the revolving credit facility.

In September 2016, we entered into a Third Amendment to the Third Amended and Restated Credit Agreement. The amendment, among other things, amends the revolving credit facility to permit the completion of the Delaware Basin Acquisition (see Note 6, Pending Acquisition) and, effective upon closing of the acquisition, adjusts the interest rate payable on amounts borrowed under the facility and increases the aggregate commitments under the facility from $450 million to $700 million (with the borrowing base remaining at $700 million).

In October 2016, we entered into a Fourth Amendment to the Third Amended and Restated Credit Agreement. The amendment, among other things, reaffirmed of our borrowing base at $700 million and made certain other immaterial modifications to the existing agreement, including an increase in the amount of our future production that we are permitted to hedge.

We had no outstanding balance on our revolving credit facility as of September 30, 2016, compared to $37 million outstanding as of December 31, 2015. The weighted-average interest rate on the outstanding balance on our revolving credit facility, exclusive of fees on the unused commitment and the letter of credit noted below, was 2.6% per annum as of December 31, 2015.

As of September 30, 2016, RNG had an irrevocable standby letter of credit of approximately $11.7 million in favor of a third-party transportation service provider to secure firm transportation of the natural gas produced by third-party producers for whom we market production in the Appalachian Basin. The letter of credit is currently scheduled to expire in September 2017 but is expected to be automatically extended annually in accordance with the letter of credit's terms and conditions. The letter of credit reduces the amount of available funds under our revolving credit facility by an amount equal to the letter of credit. As of September 30, 2016, the available funds under our revolving credit facility, including the reduction for the $11.7 million letter of credit, was $438.3 million.

The revolving credit facility contains covenants customary for agreements of this type, with the most restrictive being certain financial tests on a quarterly basis. The financial tests, as defined per the revolving credit facility as of September 30, 2016, include requirements to: (a) maintain a minimum current ratio of 1.00 to 1.00 and (b) not exceed a maximum leverage ratio of 4.25 to 1.00. As of September 30, 2016, we were in compliance with all of the revolving credit facility covenants and expect to remain in compliance throughout the next 12-month period. Effective upon closing of the Delaware Basin Acquisition, the maximum permitted leverage ratio will be reduced to 4.00 to 1.00.

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PDC ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

(unaudited)

NOTE 9 - CAPITAL LEASES

We periodically enter into non-cancelable lease agreements for vehicles utilized by our operations and field personnel. These leases are being accounted for as capital leases, as the present value of minimum monthly lease payments, including the residual value guarantee, exceeds 90% of the fair value of the leased vehicles at inception of the lease.

The following table presents leased vehicles under capital leases as of September 30, 2016:



	Amount
	(in thousands)
Vehicles	$	2,801
Accumulated depreciation	(613		)
	$	2,188

Future minimum lease payments by year and in the aggregate, under non-cancelable capital leases with terms of one year or more, consist of the following:



For the Twelve Months Ending September 30,	Amount
	(in thousands)
2017	$	860
2018	1,167
2019	553
	2,580
Less executory cost	(101		)
Less amount representing interest	(280		)
Present value of minimum lease payments	$	2,199

Short-term capital lease obligations	$	646
Long-term capital lease obligations	1,553
	$	2,199

Short-term capital lease obligations are included in other accrued expenses on the condensed consolidated balance sheets. Long-term capital lease obligations are included in other liabilities on the condensed consolidated balance sheets.

NOTE 10 - ASSET RETIREMENT OBLIGATIONS

The following table presents the changes in carrying amounts of the asset retirement obligations associated with our working interests in crude oil and natural gas properties:



	Amount
	(in thousands)

Balance at beginning of period, January 1, 2016	$	89,492
Obligations incurred with development activities	1,137
Accretion expense	5,400
Obligations discharged with disposal of properties and asset retirements	(6,620		)
Balance end of period, September 30, 2016	89,409
Less current portion	(6,900		)
Long-term portion	$	82,509

Our estimated asset retirement obligation liability is based on historical experience in plugging and abandoning wells, estimated economic lives and estimated plugging and abandonment cost considering federal and state regulatory requirements in effect. The liability is discounted using the credit-adjusted risk-free rate estimated at the time the liability is incurred or revised. In 2016, the credit-adjusted risk-free

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PDC ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

(unaudited)

rates used to discount our plugging and abandonment liabilities ranged from 7.6% to 8.0%. In periods subsequent to initial measurement of the liability, we must recognize period-to-period changes in the liability resulting from the passage of time, revisions to either the amount of the original estimate of undiscounted cash flows or changes in inflation factors and changes to our credit-adjusted risk-free rate as market conditions warrant. Short-term asset retirement obligations are included in other accrued expenses on the condensed consolidated balance sheets.

NOTE 11 - COMMITMENTS AND CONTINGENCIES

Firm Transportation, Processing and Sales Agreements. We enter into contracts that provide firm transportation, sales and processing agreements on pipeline systems through which we transport or sell crude oil and natural gas. Satisfaction of the volume requirements includes volumes produced by us, purchased from third parties and produced by our affiliated partnerships and other third-party working interest owners. We record in our financial statements only our share of costs based upon our working interest in the wells. These contracts require us to pay these transportation and processing charges whether or not the required volumes are delivered. As natural gas prices continue to remain depressed, certain third-party producers under our Gas Marketing segment have begun and continue to experience financial distress, which has led to certain contractual defaults and litigation; however, to date, we have had no material counterparty default losses. As of September 30, 2016, we have recorded an allowance for doubtful accounts of approximately $1.1 million. We have initiated several legal actions for breach of contract, collection, and related claims against certain third-party producers that are delinquent in their payment obligations, which have to date resulted in one default judgment.

The following table presents gross volume information related to our long-term firm transportation, sales and processing agreements for pipeline capacity:



	For the Twelve Months Ending September 30,
Area	2017		2018		2019		2020		2021 and Through Expiration		Total		Expiration Date

Natural gas (MMcf)
Gas Marketing segment	7,117		7,117		7,117		7,136		13,344		41,831		August 31, 2022
Utica Shale	2,738		2,738		2,738		2,745		7,754		18,713		July 22, 2023
Total	9,855		9,855		9,855		9,881		21,098		60,544

Crude oil (MBbls)
Wattenberg Field	2,413		2,413		2,413		1,813		—		9,052		June 30, 2020

Dollar commitment (in thousands)	$	17,470	$	16,324	$	16,324	$	13,205	$	8,102	$	71,425

Litigation. We are involved in various legal proceedings that we consider normal to our business. We review the status of these proceedings on an ongoing basis and, from time to time, may settle or otherwise resolve these matters on terms and conditions that management believes are in our best interests. There is no assurance that settlements can be reached on acceptable terms or that adverse judgments, if any, in the remaining litigation will not exceed the amounts reserved. Although the results cannot be known with certainty, we currently believe that the ultimate results of such proceedings will not have a material adverse effect on our financial position, results of operations or liquidity.

A group of 42 independent West Virginia natural gas producers has filed a lawsuit in Marshall County, West Virginia, naming Dominion Transmission, Inc. (“Dominion”), certain entities affiliated with Dominion, and RNG as defendants, alleging various contractual, fiduciary and related claims against the defendants, all of which are associated with firm transportation contracts entered into by plaintiffs and relating to pipelines owned and operated by Dominion and its affiliates. RNG and Dominion have removed the case to the U.S. District Court for the Northern District of West Virginia and are preparing pre-trial pleadings, including an answer to the complaint and a motion to dismiss the case. At this time, RNG is unable to estimate any potential damages associated with the claims, but believes the complaint is without merit and intends to vigorously pursue its defenses.

Environmental. Due to the nature of the natural gas and oil industry, we are exposed to environmental risks. We have various policies and procedures to minimize and mitigate the risks from environmental contamination. We conduct regular reviews to identify changes in our environmental risk profile. Liabilities are recorded when environmental damages resulting from past events that require remediation are probable and the costs can be reasonably estimated. As of September 30, 2016 and December 31, 2015, we had accrued environmental liabilities in the amount of $3.2 million and $4.1 million, respectively, included in other accrued expenses on the condensed consolidated balance sheets. We are not aware of any environmental claims existing as of September 30, 2016 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 that unknown past non-compliance with environmental laws will not be discovered on our properties.

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PDC ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

(unaudited)

In August 2015, we received a Clean Air Act Section 114 Information Request (the "Information Request") from the U.S. Environmental Protection Agency ("EPA"). The Information Request sought, among other things, information related to the design, operation, and maintenance of our production facilities in the Denver-Julesburg Basin of Colorado. The Information Request focused on historical operation and design information for 46 of our production facilities and asks that we conduct sampling and analyses at the identified 46 facilities. We responded to the Information Request in January 2016. We continue to meet with the EPA and provide additional information, but cannot predict the outcome of this matter at this time.

In addition, in December 2015, we received a Compliance Advisory pursuant to C.R.S. § 25-7-115(2) from the Colorado Department of Public Health and Environment's Air Quality Control Commission's Air Pollution Control Division alleging that we failed to design, operate, and maintain certain condensate collection, storage, processing and handling operations to minimize leakage of volatile organic compounds to the maximum extent possible at 65 facilities consistent with applicable standards under Colorado law. We are working with the agency to address the allegations, but cannot predict the outcome of this matter at this time.

Employment Agreements with Executive Officers. Each of our senior executive officers may be entitled to a severance payment and certain other benefits upon the termination of the officer's employment pursuant to the officer's employment agreement and/or the Company's executive severance compensation plan. The nature and amount of such benefits would vary based upon, among other things, whether the termination followed a change of control of the Company.

NOTE 12 - COMMON STOCK

Sale of Equity Securities

In September 2016, we completed a public offering of 9,085,000 shares of our common stock at a price to us of $61.51 per share. Net proceeds of the offering were $558.5 million, after deducting offering expenses and underwriting discounts, of which $90,850 is included in common shares-par value and $558.4 million is included in additional paid-in capital ("APIC") on the September 30, 2016 condensed consolidated balance sheet. The shares were issued pursuant to an effective shelf registration statement on Form S-3 filed with the SEC in March 2015.

In March 2016, we completed a public offering of 5,922,500 shares of our common stock at a price to us of $50.11 per share. Net proceeds of the offering were $296.6 million, after deducting offering expenses and underwriting discounts, of which $59,225 is included in common shares-par value and $296.5 million is included in APIC on the September 30, 2016 condensed consolidated balance sheet. The shares were issued pursuant to the effective shelf registration statement on Form S-3 filed with the SEC in March 2015.

In March 2015, we completed a public offering of 4,002,000 shares of our common stock at a price to us of $50.73 per share. Net proceeds of the offering were $202.9 million, after deducting offering expenses and underwriting discounts, of which $40,020 is included in common shares-par value and $202.8 million is included in APIC on the condensed consolidated balance sheets. The shares were issued pursuant to the effective shelf registration statement on Form S-3 filed with the SEC in March 2015.

Stock-Based Compensation Plans

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



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
	(in thousands)

Stock-based compensation expense	$	4,079		$	4,813		$	15,205		$	14,278
Income tax benefit	(1,552		)	(1,828		)	(5,786		)	(5,423		)
Net stock-based compensation expense	$	2,527		$	2,985		$	9,419		$	8,855

Stock Appreciation Rights ("SARs")

The SARs vest ratably over a three-year period and may be exercised at any point after vesting through ten years from the date of issuance. Pursuant to the terms of the awards, upon exercise, the executive officers 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.

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PDC ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

(unaudited)

In January 2016, the Compensation Committee awarded 58,709 SARs to our executive officers. The fair value of each SAR award was estimated on the date of grant using a Black-Scholes pricing model using the following assumptions:



	Nine Months Ended September 30,
	2016			2015

Expected term of award	6.0 years			5.2 years
Risk-free interest rate	1.8		%	1.4		%
Expected volatility	54.5		%	58.0		%
Weighted-average grant date fair value per share	$	26.96		$	22.23

The expected term 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 or declare dividends in the foreseeable future.

The following table presents the changes in our SARs for all periods presented:



	Nine Months Ended September 30,
	2016							2015
	Number of SARs		Weighted-Average Exercise Price		Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in thousands)		Number of SARs	Weighted-Average Exercise Price		Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in thousands)
Outstanding beginning of year, January 1,	326,453		$	38.99				279,011	$	38.77
Awarded	58,709		51.63					68,274	39.63
Exercised	(141,084	)	40.16			$	2,770	—	—
Outstanding at September 30,	244,078		41.36		7.1	6,273		347,285	38.94		7.5	$	4,888
Vested and expected to vest at September 30,	238,671		41.20		7.1	6,171		341,423	38.89		7.5	4,821
Exercisable at September 30,	136,644		36.74		5.9	4,143		191,149	35.68		6.6	3,312

Total compensation cost related to SARs granted, net of estimated forfeitures, and not yet recognized in our condensed consolidated statement of operations as of September 30, 2016 was $1.7 million. The cost is expected to be recognized over a weighted-average period of 1.9 years.

Restricted Stock Awards

Time-Based Awards. The fair value of the time-based restricted shares is amortized ratably over the requisite service period, primarily three years. The time-based shares generally vest ratably on each anniversary following the grant date provided that a participant is continuously employed.

In January 2016, the Compensation Committee awarded to our executive officers a total of 61,634 time-based restricted shares that vest ratably over a three-year period ending in January 2019.

The following table presents the changes in non-vested time-based awards to all employees, including executive officers, for the nine months ended September 30, 2016:



	Shares		Weighted-Average Grant Date Fair Value

Non-vested at December 31, 2015	525,081		$	50.23
Granted	269,709		57.12
Vested	(256,976	)	48.60
Forfeited	(14,716	)	55.70
Non-vested at September 30, 2016	523,098		54.43

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PDC ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

(unaudited)

The following table presents the weighted-average grant date fair value per share and related information as of/for the periods presented:



	As of/for the Nine Months Ended September 30,
	2016		2015
	(in thousands, except per share data)

Total intrinsic value of time-based awards vested	$	14,675	$	13,061
Total intrinsic value of time-based awards non-vested	35,079		30,959
Market price per common share as of September 30,	67.06		53.01
Weighted-average grant date fair value per share	57.12		48.58

Total compensation cost related to non-vested time-based awards, net of estimated forfeitures, and not yet recognized in our condensed consolidated statements of operations as of September 30, 2016 was $18.7 million. This cost is expected to be recognized over a weighted-average period of 1.9 years.

Market-Based Awards. The fair value of the market-based restricted shares is amortized ratably over the requisite service period, primarily three years. The market-based shares vest if the participant is continuously employed throughout the performance period and the market-based performance measure is achieved, with a maximum vesting period of three years. All compensation cost related to the market-based awards will be recognized if the requisite service period is fulfilled, even if the market condition is not achieved.

In January 2016, the Compensation Committee awarded a total of 24,280 market-based restricted shares to our executive officers. In addition to continuous employment, the vesting of these shares is contingent on the Company's total shareholder return ("TSR"), which is essentially the Company’s stock price change including any dividends, as compared to the TSR of a group of peer companies. The shares are measured over a three-year period ending on December 31, 2018 and can result in a payout between 0% and 200% of the total shares awarded. The weighted-average grant date fair value per market-based share for these awards was computed using the Monte Carlo pricing model using the following assumptions:



	Nine Months Ended September 30,
	2016			2015

Expected term of award	3 years			3 years
Risk-free interest rate	1.2		%	0.9		%
Expected volatility	52.3		%	53.0		%
Weighted-average grant date fair value per share	$	72.54		$	66.16

The expected term of the awards was based on the requisite service period. The risk-free interest rate was based on the U.S. Treasury yields in effect at the time of grant and extrapolated to approximate the life of the award. The expected volatility was based on our historical volatility.

The following table presents the change in non-vested market-based awards during the nine months ended September 30, 2016:



	Shares		Weighted-Average Grant Date Fair Value per Share

Non-vested at December 31, 2015	71,549		$	63.60
Granted	24,280		72.54
Vested (1)	(11,283	)	98.50
Non-vested at September 30, 2016	84,546		61.51

__________

(1)Vested shares were issued at 200% based on our relative total shareholder return as ranked among the Company's peer group.

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PDC ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

(unaudited)

The following table presents the weighted-average grant date fair value per share and related information as of/for the periods presented:



	As of/for the Nine Months Ended September 30,
	2016		2015
	(in thousands, except per share data)

Total intrinsic value of market-based awards vested	$	1,174	$	—
Total intrinsic value of market-based awards non-vested	5,670		5,996
Market price per common share as of September 30,	67.06		53.01
Weighted-average grant date fair value per share	72.54		66.16

Total compensation cost related to non-vested market-based awards, net of estimated forfeitures, and not yet recognized in our condensed consolidated statements of operations as of September 30, 2016 was $1.9 million. This cost is expected to be recognized over a weighted-average period of 1.9 years.

NOTE 13 - EARNINGS PER SHARE

Basic earnings per share is computed by dividing net earnings by the weighted-average number of common shares outstanding for the period. Diluted earnings per share is similarly computed, except that the denominator includes the effect, using the treasury stock method, of unvested restricted stock, outstanding SARs, stock options, convertible notes and shares held pursuant to our non-employee director deferred compensation plan, if including such potential shares of common stock is dilutive.

The following table presents a reconciliation of the weighted-average diluted shares outstanding:



	Three Months Ended September 30,						Nine Months Ended September 30,