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 June 30, 2017

£ 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," "smaller reporting company," and "emerging growth 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
	Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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: 65,865,441 shares of the Company's Common Stock ($0.01 par value) were outstanding as of July 20, 2017.

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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 Statement 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	27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	46
Item 4.	Controls and Procedures	49

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	49
Item 1A.	Risk Factors	50
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	50
Item 3.	Defaults Upon Senior Securities	50
Item 4.	Mine Safety Disclosures	50
Item 5.	Other Information	50
Item 6.	Exhibits	51

	SIGNATURES	52

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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"), Section 21E of the Securities Exchange Act of 1934 ("Exchange Act"), and the United States ("U.S.") Private Securities Litigation Reform Act of 1995 regarding our business, financial condition, results of operations, and prospects. All statements other than statements of historical fact included in and incorporated by reference into this report are "forward-looking statements." Words such as expects, anticipates, intends, plans, believes, seeks, estimates, and similar expressions or variations of such words are intended to identify forward-looking statements herein. Forward-looking statements may include, among other things, statements regarding future: reserves, production, costs, cash flows, and earnings; drilling locations and growth opportunities; capital investments and projects, including expected lateral lengths of wells, drill times and number of rigs employed; rates of return; operational enhancements and efficiencies; management of lease expiration issues; financial ratios; and midstream capacity and related curtailments.

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 our 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 and prices for the products we produce;


•	volatility of commodity prices for crude oil, natural gas, and natural gas liquids ("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 of 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 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;


•	losses from our gas marketing business exceeding our expectations;


•	difficulties in integrating our operations as a result of any significant acquisitions, including our recent acquisitions in the Delaware Basin;


•	increases or changes in operating costs, severance and ad valorem taxes, and increases or changes in drilling, completion, and facilities costs;


•	potential losses of acreage due to lease expirations or otherwise;


•	increases or adverse changes in construction costs and procurement costs associated with future build out of midstream-related assets;


•	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;

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•	cost of pending or future litigation, including recent environmental litigation;


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


•	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, 2016 (the "2016 Form 10-K"), filed with the U.S. Securities and Exchange Commission ("SEC") on February 28, 2017, 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 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.

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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)



	June 30, 2017			December 31, 2016
Assets
Current assets:
Cash and cash equivalents	$	202,291		$	244,100
Accounts receivable, net	135,203			143,392
Fair value of derivatives	52,105			8,791
Prepaid expenses and other current assets	6,619			3,542
Total current assets	396,218			399,825
Properties and equipment, net	4,165,572			4,008,266
Fair value of derivatives	16,397			2,386
Goodwill	56,331			62,041
Other assets	22,410			13,324
Total Assets	$	4,656,928		$	4,485,842

Liabilities and Stockholders' Equity
Liabilities
Current liabilities:
Accounts payable	$	152,492		$	66,322
Production tax liability	35,296			24,767
Fair value of derivatives	10,138			53,595
Funds held for distribution	86,846			71,339
Accrued interest payable	15,955			15,930
Other accrued expenses	29,939			38,625
Total current liabilities	330,666			270,578
Long-term debt	1,049,004			1,043,954
Deferred income taxes	452,028			400,867
Asset retirement obligations	77,867			82,612
Fair value of derivatives	2,311			27,595
Other liabilities	30,610			37,482
Total liabilities	1,942,486			1,863,088

Commitments and contingent liabilities

Stockholders' equity
Common shares - par value $0.01 per share, 150,000,000 authorized, 65,927,104 and 65,704,568 issued as of June 30, 2017 and December 31, 2016, respectively	659			657
Additional paid-in capital	2,495,940			2,489,557
Retained earnings	221,604			134,208
Treasury shares - at cost, 64,024 and 28,763 as of June 30, 2017 and December 31, 2016, respectively	(3,761		)	(1,668		)
Total stockholders' equity	2,714,442			2,622,754
Total Liabilities and Stockholders' Equity	$	4,656,928		$	4,485,842

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 June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
Revenues
Crude oil, natural gas, and NGLs sales	$	213,602		$	110,841		$	403,294		$	186,208
Commodity price risk management gain (loss), net of settlements	57,932			(92,801		)	138,636			(81,745		)
Other income	3,624			2,057			6,935			6,465
Total revenues	275,158			20,097			548,865			110,928
Costs, expenses and other
Lease operating expenses	20,028			13,675			39,817			29,005
Production taxes	15,042			6,043			27,441			10,114
Transportation, gathering and processing expenses	6,488			4,465			12,390			8,506
General and administrative expense	29,531			23,579			55,846			46,358
Exploration, geologic, and geophysical expense	1,033			237			1,987			447
Depreciation, depletion and amortization	126,013			107,014			235,329			204,402
Impairment of properties and equipment	27,566			4,170			29,759			5,171
Accretion of asset retirement obligations	1,666			1,811			3,434			3,623
(Gain) loss on sale of properties and equipment	(532		)	260			(692		)	176
Provision for uncollectible notes receivable	(40,203		)	—			(40,203		)	44,738
Other expenses	3,890			2,125			7,418			4,703
Total costs, expenses and other	190,522			163,379			372,526			357,243
Income (loss) from operations	84,636			(143,282		)	176,339			(246,315		)
Interest expense	(19,617		)	(10,672		)	(39,084		)	(22,566		)
Interest income	768			177			1,008			1,735
Income (loss) before income taxes	65,787			(153,777		)	138,263			(267,146		)
Income tax (expense) benefit	(24,537		)	58,327			(50,867		)	100,166
Net income (loss)	$	41,250		$	(95,450	)	$	87,396		$	(166,980	)

Earnings per share:
Basic	$	0.63		$	(2.04	)	$	1.33		$	(3.78	)
Diluted	$	0.62		$	(2.04	)	$	1.32		$	(3.78	)

Weighted-average common shares outstanding:
Basic	65,859			46,742			65,804			44,175
Diluted	66,019			46,742			66,066			44,175

See accompanying Notes to Condensed Consolidated Financial Statements

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PDC ENERGY, INC.

Condensed Consolidated Statements of Cash Flows

(unaudited; in thousands)



	Six Months Ended June 30,
	2017			2016
Cash flows from operating activities:
Net income (loss)	$	87,396		$	(166,980	)
Adjustments to net income (loss) to reconcile to net cash from operating activities:
Net change in fair value of unsettled commodity derivatives	(126,070		)	201,825
Depreciation, depletion and amortization	235,329			204,402
Impairment of properties and equipment	29,759			5,171
Provision for uncollectible notes receivable	(40,203		)	44,738
Accretion of asset retirement obligations	3,434			3,623
Non-cash stock-based compensation	9,826			11,126
(Gain) loss on sale of properties and equipment	(692		)	176
Amortization of debt discount and issuance costs	6,399			3,077
Deferred income taxes	50,767			(102,319		)
Other	670			(1,287		)
Changes in assets and liabilities	6,582			(5,754		)
Net cash from operating activities	263,197			197,798
Cash flows from investing activities:
Capital expenditures for development of crude oil and natural gas properties	(334,406		)	(234,677		)
Capital expenditures for other properties and equipment	(2,299		)	(1,030		)
Acquisition of crude oil and natural gas properties, including settlement adjustments	5,372			—
Proceeds from sale of properties and equipment	1,293			4,903
Sale of promissory note	40,203			—
Restricted cash	(9,250		)	—
Sale of short-term investments	49,890			—
Purchase of short-term investments	(49,890		)	—
Net cash from investing activities	(299,087		)	(230,804		)
Cash flows from financing activities:
Proceeds from issuance of equity, net of issuance cost	—			296,575
Proceeds from revolving credit facility	—			85,000
Repayment of revolving credit facility	—			(122,000		)
Redemption of convertible notes	—			(115,000		)
Purchase of treasury shares	(5,274		)	(4,055		)
Other	(645		)	735
Net cash from financing activities	(5,919		)	141,255
Net change in cash and cash equivalents	(41,809		)	108,249
Cash and cash equivalents, beginning of period	244,100			850
Cash and cash equivalents, end of period	$	202,291		$	109,099

Supplemental cash flow information:
Cash payments (receipts) for:
Interest, net of capitalized interest	$	32,647		$	19,988
Income taxes	(39		)	167
Non-cash investing and financing activities:
Change in accounts payable related to purchases of properties and equipment	$	81,891		$	(28,999	)
Change in asset retirement obligations, with a corresponding change to crude oil and natural gas properties, net of disposals	2,415			843
Purchase of properties and equipment under capital leases	2,160			1,074

See accompanying Notes to Condensed Consolidated Financial Statements

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PDC ENERGY, INC.

Condensed Consolidated Statement of Equity

(unaudited; in thousands, except share data)



	Common Stock							Treasury Stock
	Shares		Amount		Additional Paid-in Capital			Shares		Amount			Retained Earnings			Total Stockholders' Equity

Balance, December 31, 2016	65,704,568		$	657	$	2,489,557		(28,763	)	$	(1,668	)	$	134,208		$	2,622,754
Net income	—		—		—			—		—			87,396		87,396,000	87,396
Issuance pursuant to acquisition	—		—		(82		)	—		—			—			(82		)
Issuance pursuant to sale of equity	—		—		(7		)	—		—			—			(7		)
Convertible debt discount, net of issuance costs and tax	—		—		(2		)	—		—			—			(2		)
Purchase of treasury shares	—		—		—			(79,381	)	(5,274		)	—			(5,274		)
Issuance of treasury shares	(46,822	)	2		(3,350		)	46,822		3,350			—			2
Non-employee directors' deferred compensation plan	—		—		(2		)	(2,702	)	(169		)	—			(171		)
Issuance of stock awards, net of forfeitures	269,358		—		—			—		—			—			—
Stock-based compensation expense	—		—		9,826			—		—			—			9,826
Balance, June 30, 2017	65,927,104		$	659	$	2,495,940		(64,024	)	$	(3,761	)	$	221,604		$	2,714,442

See accompanying Notes to Condensed Consolidated Financial Statements

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PDC ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017

(unaudited)

NOTE 1 - NATURE OF OPERATIONS AND BASIS OF PRESENTATION

PDC Energy, Inc. ("PDC", the "Company," "we," "us," or "our") is a domestic independent exploration and production company that produces, develops, and explores for crude oil, natural gas, and NGLs, with primary operations in the Wattenberg Field in Colorado and, beginning in December 2016, the Delaware Basin in Reeves and Culberson Counties, Texas. We also have operations in the Utica Shale in Southeastern Ohio. Subsequent to June 30, 2017, as part of plans to divest the Utica Shale properties, we engaged an investment banking group to assist in marketing them for sale; therefore, these properties will be classified as held-for-sale upon meeting the criteria for such classification in the third quarter of 2017. Our operations in the Wattenberg Field are focused in the horizontal Niobrara and Codell plays and our Delaware Basin operations are currently focused in the Wolfcamp zones. As of June 30, 2017, we owned an interest in approximately 2,900 gross productive wells. We are engaged in two operating segments: our oil and gas exploration and production segment and our gas marketing segment. Beginning in 2017, our gas marketing segment does not meet the quantitative thresholds to require disclosure as a separate reportable segment. All of our material operations are attributable to our exploration and production business; therefore, all of our operations are presented as a single segment for all periods presented.

The accompanying unaudited condensed consolidated financial statements include the accounts of PDC, our wholly-owned subsidiaries, and our proportionate share of our two 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 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, 2016 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 2016 Form 10-K. Our results of operations and cash flows for the three and six months ended June 30, 2017 are not necessarily indicative of the results to be expected for the full year or any other future period.

Certain immaterial reclassifications have been made to our prior period statement of operations to conform to the current period presentation. The reclassifications had no impact on previously reported cash flows, net earnings, earnings per share or stockholders' equity.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Recently Issued Accounting Standards

In May 2014, the 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. In December 2016, the FASB issued technical corrections and improvements to the standard. 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 in the process of assessing potential impacts of the new standard on our existing revenue recognition criteria, as well as on related revenue recognition disclosures.

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PDC ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017

(unaudited)

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 a right-of-use asset and lease liability for its right to use the underlying asset and 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 in the process of assessing the impact these changes may have on our 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 consolidated financial statements.

In November 2016, the FASB issued an accounting update on statements of cash flows to address diversity in practice in the classification and presentation of changes in restricted cash. The accounting update requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash or restricted cash equivalents should be included with cash and cash equivalents when reconciling beginning-of-period and end-of-period amounts shown on the statement of cash flows. 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 consolidated financial statements.

In January 2017, the FASB issued an accounting update to simplify the subsequent measurement of goodwill. The update eliminates the two-step process that required identification of potential impairment and a separate measure of actual impairment. The annual and/or interim assessments are still required to be completed. The guidance is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. We elected to early adopt this standard in the second quarter of 2017 and will implement the new guidance accordingly in performing impairment testing in 2017. Our annual evaluation of goodwill for impairment is expected to occur in the fourth quarter of 2017, at which time we will apply this accounting update and the impact can be determined.

In May 2017, the FASB issued an accounting update clarifying when to account for a change to the terms or conditions of a share-based payment award as a modification. The guidance is effective for fiscal years beginning on or after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. Adoption of this standard is not expected to have a significant impact on our condensed consolidated financial statements.

NOTE 3 - BUSINESS COMBINATION

Delaware Basin Acquisition. On December 6, 2016, we closed on an acquisition which has been accounted for as a business combination. The transaction was for the purchase of approximately 57,900 net acres, approximately 30 completed and producing wells and related midstream infrastructure in Reeves and Culberson Counties, Texas, for an aggregate consideration to the sellers of approximately $1.64 billion, after preliminary post-closing adjustments, comprised of approximately $946.0 million in cash, including the payment of $40.0 million of debt of the seller at closing and other purchase price adjustments, and 9.4 million shares of our common stock valued at approximately $690.7 million at the time the acquisition closed. The estimated fair value of assets acquired and liabilities assumed in the acquisition presented below are preliminary and subject to customary additional post-closing adjustments as more detailed analysis associated with the acquired properties is completed. The final settlement statement has been agreed upon with the sellers; however, we are in the process of finalizing the fair values of the assets acquired and liabilities assumed and expect to keep the transaction open through the third quarter of 2017 to ensure that any final allocation adjustments associated with the period through final settlement are appropriately reflected in the final purchase price allocation. The most significant item to be completed is the allocation of the per acre values across the acquisition. There were a significant number of leases acquired with complex lease terms and

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PDC ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017

(unaudited)

evaluation of these terms may impact the manner in which the purchase price allocation across the acquired acreage is finalized based upon lease expiration timing. We expect that the completion of this process will adjust our final determination of the value of goodwill.

The details of the estimated purchase price and the preliminary allocation of the purchase price for the transaction, which reflects certain post-closing adjustments, are presented below (in thousands):



	June 30, 2017
Acquisition costs:
Cash, net of cash acquired	$	905,962
Retirement of seller's debt	40,000
Total cash consideration	945,962
Common stock, 9.4 million shares	690,702
Other purchase price adjustments	1,025
Total acquisition costs	$	1,637,689

Recognized amounts of identifiable assets acquired and liabilities assumed:
Assets acquired:
Current assets	$	6,561
Crude oil and natural gas properties - proved	216,000
Crude oil and natural gas properties - unproved	1,721,334
Infrastructure, pipeline, and other	33,695
Construction in progress	12,148
Goodwill	56,331
Total assets acquired	2,046,069
Liabilities assumed:
Current liabilities	(23,844		)
Asset retirement obligations	(4,248		)
Deferred tax liabilities, net	(380,288		)
Total liabilities assumed	(408,380		)
Total identifiable net assets acquired	$	1,637,689

The fair value measurements of assets acquired and liabilities assumed are based on inputs that are not observable in the market, and therefore represent Level 3 inputs. The fair values of crude oil and natural gas properties and asset retirement obligations were measured using valuation techniques that convert future cash flows to a single discounted amount. Significant inputs to the valuation of crude oil and natural gas properties include estimates of reserves, future operating and development costs, future commodity prices, estimated future cash flows, lease terms and expirations, and a market-based weighted-average cost of capital rate. These inputs require significant judgments and estimates by management at the time of the valuation and are the most sensitive and subject to change.

This acquisition was accounted for under the acquisition method. Accordingly, we conducted assessments of net assets acquired and recognized amounts for identifiable assets acquired and liabilities assumed at their estimated acquisition date fair values, while transaction and integration costs associated with the acquisition were expensed as incurred.

Goodwill. Goodwill is calculated as the excess of the purchase price over the fair value of net assets acquired and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Among the factors that contributed to a purchase price in excess of the fair value of the net tangible and intangible assets acquired were the acquisition of an element of a workforce and the expected value from operations of the Delaware Basin acquisition to be derived in the future. The amount of goodwill that was recorded on a preliminary basis related to the Delaware Basin acquisition has decreased as compared to the initial estimated amount recorded as of December 31, 2016, due to customary purchase price allocations, primarily related to a refund from the sellers in connection with a revised valuation of certain acquired leases and the retirement of estimated environmental remediation liabilities. Such amounts will be finalized with final purchase accounting, as described above. Any value assigned to goodwill is not expected to be deductible for income tax purposes.

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PDC ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017

(unaudited)

The following table presents the changes in goodwill:



	Amount
	(in thousands)

Balance at December 31, 2016	$	62,041
Purchase price adjustments, net of tax	(5,710		)
Balance at June 30, 2017	$	56,331

With the creation of goodwill from this transaction, we will perform our evaluation of goodwill for impairment annually or when a triggering event is deemed to have occurred. We evaluate goodwill for impairment by either performing a qualitative evaluation or a quantitative test, which involves comparing the estimated fair value to the carrying value. In either case, the valuation of goodwill will be a significant estimate as such methods incorporate forward-looking assumptions and estimates.

NOTE 4 - PROPERTIES AND EQUIPMENT

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



	June 30, 2017			December 31, 2016
	(in thousands)
Properties and equipment, net:
Crude oil and natural gas properties
Proved	$	3,842,942		$	3,499,718
Unproved	1,841,589			1,874,671
Total crude oil and natural gas properties	5,684,531			5,374,389
Infrastructure, pipeline, and other	94,654			62,093
Land and buildings	15,274			12,165
Construction in progress	171,600			122,591
Properties and equipment, at cost	5,966,059			5,571,238
Accumulated DD&A	(1,800,487		)	(1,562,972		)
Properties and equipment, net	$	4,165,572		$	4,008,266

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



	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
	(in thousands)

Impairment of unproved properties	$	27,463	$	1,084	$	29,565	$	2,053
Amortization of individually insignificant unproved properties	103		54		194		86
Impairment of crude oil and natural gas properties	27,566		1,138		29,759		2,139
Land and buildings	—		3,032		—		3,032
Total impairment of properties and equipment	$	27,566	$	4,170	$	29,759	$	5,171

During the three months ended June 30, 2017, we impaired certain unproved Delaware Basin leasehold positions totaling $27.0 million that expired during the three months ending June 30, 2017, or are projected to expire between June 30, 2017 and December 31, 2017. Subsequent to closing the acquisitions in the Delaware Basin, it was determined that development of certain acreage tracts would not meet our internal expectations for acceptable rates of return due to a combination of weakening commodity prices; higher per well development and operational costs; and updated technical analysis. As a result, we allowed or expect to allow certain acreage to expire, and in other circumstances we were unable to obtain necessary lease term extensions.

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PDC ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017

(unaudited)

NOTE 5 - COMMODITY 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, natural gas, and propane, which is an element of our NGLs, we enter into commodity derivative contracts to protect against price declines in future periods. While we structure these commodity derivatives to reduce our exposure to decreases in commodity prices, they also limit the benefit we might otherwise receive from price increases.

We believe our commodity derivative instruments continue to be effective in achieving the risk management objectives for which they were intended. As of June 30, 2017, we had derivative instruments, which were comprised of collars, fixed-price swaps, and basis protection swaps, in place for a portion of our anticipated 2017 and 2018 production for a total of 12,896 MBbls of crude oil, 82,030 BBtu of natural gas, and 643 MBbls of propane. Our commodity derivative contracts have been entered into at no cost to us as we hedge our anticipated production at the then-prevailing commodity market prices, without adjustment for premium or discount.

We have not elected to designate any of our derivative instruments as cash flow hedges, and therefore these instruments do not qualify for hedge accounting. Accordingly, changes in the fair value of our derivative instruments are recorded in the condensed consolidated statements of operations.

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	June 30, 2017		December 31, 2016
			(in thousands)
Derivative assets:	Current
	Commodity derivative contracts	Fair value of derivatives	$	49,540	$	8,490
	Basis protection derivative contracts	Fair value of derivatives	2,565		301
			52,105		8,791
	Non-current
	Commodity derivative contracts	Fair value of derivatives	15,051		1,123
	Basis protection derivative contracts	Fair value of derivatives	1,346		1,263
			16,397		2,386
Total derivative assets			$	68,502	$	11,177

Derivative liabilities:	Current
	Commodity derivative contracts	Fair value of derivatives	$	9,943	$	53,565
	Basis protection derivative contracts	Fair value of derivatives	195		30
			10,138		53,595
	Non-current
	Commodity derivative contracts	Fair value of derivatives	2,311		27,595
			2,311		27,595
Total derivative liabilities			$	12,449	$	81,190

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PDC ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017

(unaudited)

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



	Three Months Ended June 30,					Six Months Ended June 30,
Condensed consolidated statement of operations line item	2017		2016			2017		2016
	(in thousands)
Commodity price risk management gain, net
Net settlements	$	12,015	$	53,301		$	12,566	$	120,132
Net change in fair value of unsettled derivatives	45,917		(146,102		)	126,070		(201,877		)
Total commodity price risk management gain, net	$	57,932	$	(92,801	)	$	138,636	$	(81,745	)

Net settlements of commodity derivatives decreased for the three and six months ended June 30, 2017 as compared to the three and six months ended June 30, 2016. We entered into agreements for the derivative instruments that settled throughout 2016 prior to commodity prices becoming depressed in late 2014. Substantially all of these higher-value agreements settled by the end of 2016. Net settlements for the three and six months ended June 30, 2017 reflect derivative instruments entered into since 2015, which more closely approximate recent realized prices. Based upon the forward strip pricing at June 30, 2017, we expect that settlements will continue to be substantially lower in 2017 on a relative basis as compared to those in 2016.

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. 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 June 30, 2017	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	$	68,502	$	(10,974	)	$	57,528

Liability derivatives:
Derivative instruments, at fair value	$	12,449	$	(10,974	)	$	1,475



As of December 31, 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	$	11,177	$	(10,930	)	$	247

Liability derivatives:
Derivative instruments, at fair value	$	81,190	$	(10,930	)	$	70,260

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PDC ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017

(unaudited)

NOTE 6 - 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, determination that the source of the inputs is valid, 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.

Our crude oil and natural gas fixed-price swaps are included in Level 2. Our collars, physical sales, and propane fixed-price swaps are included in Level 3. Our basis swaps are included in Level 2 and 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:



	June 30, 2017									December 31, 2016
	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:
Total assets	$	58,226		$	10,276		$	68,502		$	6,350		$	4,827		$	11,177
Total liabilities	(10,792		)	(1,657		)	(12,449		)	(66,789		)	(14,401		)	(81,190		)
Net asset (liability)	$	47,434		$	8,619		$	56,053		$	(60,439	)	$	(9,574	)	$	(70,013	)

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PDC ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017

(unaudited)

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



	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
	(in thousands)
Fair value of Level 3 instruments, net asset (liability) beginning of period	$	2,316		$	73,195		$	(9,574	)	$	91,288
Changes in fair value included in condensed consolidated statement of operations line item:
Commodity price risk management gain (loss), net	9,262			(26,422		)	22,622			(20,257		)
Settlements included in condensed consolidated statement of operations line items:
Commodity price risk management gain (loss), net	(2,959		)	(19,398		)	(4,429		)	(43,656		)
Fair value of Level 3 instruments, net asset end of period	$	8,619		$	27,375		$	8,619		$	27,375

Net change in fair value of Level 3 unsettled derivatives included in condensed consolidated statement of operations line item:
Commodity price risk management gain (loss), net	$	8,161		$	(18,210	)	$	17,194		$	(13,105	)

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 and goodwill for possible impairment when events and circumstances indicate a possible decline in the recoverability of the carrying value of such assets. 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. The fair value of the goodwill is determined using either a qualitative method or a quantitative method, both of which utilize market data, a Level 2 input, in the derivation of the value estimation.

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, we have determined an estimate of the fair values based on measurements of trading activity and broker and/or dealer quotes, respectively, which are published market prices, and therefore are Level 2 inputs. The table below presents these estimates of the fair value of the portion of our long-term debt related to our senior notes and convertible notes as of June 30, 2017.



		Estimated Fair Value		Percent of Par
		(in millions)
Senior notes:
	2021 Convertible Notes	$	180.8	90.4	%
	2022 Senior Notes	520.6		104.1	%
	2024 Senior Notes	406.0		101.5	%

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.

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PDC ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017

(unaudited)

Concentration of Risk

Derivative Counterparties. A portion of our liquidity relates to commodity derivative instruments that enable us to manage a portion of our exposure to price volatility from producing crude oil and natural gas. These arrangements expose us to credit risk of nonperformance by our counterparties. We primarily use financial institutions who are also major lenders under our revolving credit facility as counterparties to our commodity derivative contracts. An insignificant portion of our commodity derivative instruments may be with other counterparties. To date, we have had no derivative counterparty default losses. 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 current counterparties on the fair value of our derivative instruments is not significant at June 30, 2017, taking into account the estimated likelihood of nonperformance.

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 June 30, 2017. We maintain our cash and cash equivalents in the form of money market and checking accounts with financial institutions that we believe are creditworthy and are also major lenders under our revolving credit facility.

Notes Receivable. In October 2014, we sold our entire 50 percent ownership interest in PDC Mountaineer, LLC to an unrelated third-party. As part of the consideration, we received a promissory note (the “Promissory Note”) for a principal sum of $39.0 million, bearing varying interest rates. The interest was to be paid quarterly, in arrears and at the option of the issuer, could be paid-in-kind (“PIK Interest”) and any such PIK Interest would be subject to the then current interest rate.

We regularly analyzed the Promissory Note for evidence of collectability, evaluating factors such as the creditworthiness of the issuer of the Promissory Note and the value of the underlying assets that secure the Promissory Note. Based upon this analysis, during the quarter ended March 31, 2016, we recognized a provision and recorded an allowance for uncollectible notes receivable for the $44.0 million accumulated outstanding balance, including interest. Commencing in the second quarter of 2016, we ceased recognizing interest income on the Promissory Note and began accounting for the interest on the Promissory Note under the cash basis method.

We performed this analysis as of March 31, 2017 and evaluated preliminary 2016 year-end financial statements of the note issuer which were available at such time, related information about the operations of the issuer, and existing market conditions for natural gas. Based upon this evaluation, it was determined that collection of the Promissory Note and PIK Interest continued to be doubtful and the full valuation allowance on the Promissory Note remained appropriate as of that date. This evaluation assumed repayment of the Promissory Note would be made exclusively from the existing operations of the issuer of the Promissory Note based on the latest available information.

In April 2017, we sold the Promissory Note to an unrelated third-party buyer for approximately $40.2 million in cash. The sales agreement transferred all of our legal rights to collect from the issuer of the Promissory Note. Accordingly, we reversed $40.2 million of the provision for uncollectible notes receivable during the three months ended June 30, 2017.

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 annual earnings compared to annual projections, our effective tax rate may vary quarterly and may make quarterly comparisons not meaningful. The quarterly income tax provision is generally comprised of tax expense on income or benefit on loss at the most recent estimated annual effective income tax rate, adjusted for the effect of discrete items.

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PDC ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017

(unaudited)

The effective income tax rates for the three and six months ended June 30, 2017 was 37.3 percent and 36.8 percent expense on income, respectively, compared to 37.9 percent and 37.5 percent benefit on loss for the three and six months ended June 30, 2016. The effective income tax rates for the three and six months ended June 30, 2017 include discrete income tax benefits of $0.2 million and $1.8 million relating to the excess income tax basis recognized with the vesting of stock awards during the three and six months ended June 30, 2017, which resulted in a 0.3 percent and 1.3 percent reduction to our effective income tax rates.

The effective income tax rates for the three and six months ended June 30, 2017, are based upon a full year forecasted tax provision on income and are greater than the statutory federal income tax rate, primarily due to state income taxes, nondeductible officers’ compensation and nondeductible lobbying expenses, partially offset by stock-based compensation tax deductions. We anticipate the potential for increased periodic volatility in future effective income tax rates from the impact of stock-based compensation tax deductions as they are treated as discrete tax items. The effective income tax rates for the three and six months ended June 30, 2016, were based upon a full year forecasted income tax benefit on loss and were greater than the statutory federal income tax rate, primarily due to state income taxes and percentage depletion, partially offset by nondeductible officers’ compensation and nondeductible lobbying expenses. There were no significant discrete income tax items recorded during the three and six months ended June 30, 2016.

As of June 30, 2017, there is no liability for unrecognized income 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 Compliance Assurance Program for the 2016 and 2017 tax years, and received final acceptance of our 2015 federal income tax return during the six months ended June 30, 2017.

NOTE 8 - LONG-TERM DEBT

Long-term debt consisted of the following as of:



	June 30, 2017			December 31, 2016
	(in thousands)
Senior notes:
1.125% Convertible Notes due 2021:
Principal amount	$	200,000		$	200,000
Unamortized discount	(33,952		)	(37,475		)
Unamortized debt issuance costs	(4,103		)	(4,584		)
1.125% Convertible Notes due 2021, net of unamortized discount and debt issuance costs	161,945			157,941

7.75% Senior Notes due 2022:
Principal amount	500,000			500,000
Unamortized debt issuance costs	(5,882		)	(6,443		)
7.75% Senior Notes due 2022, net of unamortized debt issuance costs	494,118			493,557

6.125% Senior Notes due 2024:
Principal amount	400,000			400,000
Unamortized debt issuance costs	(7,060		)	(7,544		)
6.125% Senior Notes due 2024, net of unamortized debt issuance costs	392,940			392,456

Total senior notes	1,049,003			1,043,954

Revolving credit facility	—			—
Total long-term debt, net of unamortized discount and debt issuance costs	$	1,049,003		$	1,043,954

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PDC ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017

(unaudited)

Senior Notes

2021 Convertible Notes. In September 2016, we issued $200 million of 1.125% convertible senior notes due 2021 (the "2021 Convertible Notes") in a public offering. 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. The conversion stock price at maturity is $85.39 per share. We allocated the gross proceeds of the 2021 Convertible Notes between the liability and equity components of the debt. The initial $160.5 million liability component was determined based on the fair value of similar debt instruments, excluding the conversion feature, priced on the same day we issued the 2021 Convertible Notes. Approximately $4.8 million in costs associated with the issuance of the 2021 Convertible Note have been capitalized as debt issuance costs. As of June 30, 2017, 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 percent.

Upon conversion, the 2021 Convertible Notes may be settled, at our sole 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 of our common stock, as well as cash in lieu of fractional shares.

2022 Senior Notes. In October 2012, we issued $500 million aggregate principal amount 7.75% senior notes due October 15, 2022 (the “2022 Senior Notes”). The 2022 Senior Notes accrue interest from the date of issuance and interest is payable semi-annually in arrears on April 15 and October 15. Approximately $11.0 million in costs associated with the issuance of the 2022 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.

2024 Senior Notes. 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 to qualified institutional buyers. In May 2017, in accordance with the registration rights agreement that we entered into with the initial purchasers when we issued the 2024 Senior Notes, we filed a registration statement with the SEC relating to an offer to exchange the 2024 Senior Notes for registered notes with substantially identical terms. 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. 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.

In January 2017, pursuant to the filing of supplemental indentures for the 2021 Convertible Notes, 2022 Senior Notes, and the 2024 Senior Notes (collectively, the "Notes"), our wholly-owned subsidiary, PDC Permian, Inc., became a guarantor of our obligations under the Notes. Accordingly, condensed consolidating financial information for PDC and PDC Permian, Inc. is presented in the footnote titled Subsidiary Guarantor.

As of June 30, 2017, we were in compliance with all covenants related to the Notes, and expect to remain in compliance throughout the next 12-month period.

Revolving Credit Facility

Revolving Credit Facility. The revolving credit facility is available for working capital requirements, capital investments, acquisitions, general corporate purposes and to support letters of credit. The revolving credit facility matures in May 2020 and provides for a maximum of $1 billion in allowable borrowing capacity, subject to the borrowing base and certain limitations under our senior notes. 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. The borrowing base is subject to a semi-annual redetermination on November 1 and May 1 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 a pledge of the stock of certain of our subsidiaries, mortgages of certain producing crude oil and natural gas properties and substantially all of our and such subsidiaries' other assets. Our affiliated partnerships are not guarantors of our obligations under the revolving credit facility.

In May 2017, we entered into a Fifth Amendment to the Third Amended and Restated Credit Agreement. The amendment, among other things, amends the revolving credit facility to reflect an increase in the borrowing base from $700 million to $950 million. We have elected to maintain a $700 million commitment level as of the date of this report. In

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PDC ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017

(unaudited)

addition, the Fifth Amendment made changes to certain of the financial and non-financial covenants in the existing agreement, as well as other administrative changes.

As of June 30, 2017 and December 31, 2016, debt issuance costs related to our revolving credit facility were $7.5 million and $8.8 million, respectively, and are included in other assets on the condensed consolidated balance sheets. We had no outstanding balance on our revolving credit facility as of June 30, 2017 or December 31, 2016. The outstanding principal amount under the revolving credit facility accrues interest at a varying interest rate that fluctuates with an alternate base rate (equal to the greatest of JPMorgan Chase Bank, N.A.'s prime rate, the federal funds rate plus a premium and the rate for dollar deposits in the London interbank market (“LIBOR”) for one month plus a premium), or at our election, a rate equal to LIBOR for certain time periods. Additionally, commitment fees, interest margin, and other bank fees, charged as a component of interest, vary with our utilization of the facility. As of June 30, 2017, the applicable interest margin is 1.25 percent for the alternate base rate option or 2.25 percent for the LIBOR option, and the unused commitment fee is 0.50 percent. No principal payments are generally required until the revolving credit facility expires in May 2020, or in the event that the borrowing base falls below the outstanding balance.

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, include requirements to: (a) maintain a minimum current ratio of 1.0:1.0 and (b) not exceed a maximum leverage ratio of 4.0:1.0. As of June 30, 2017, we were in compliance with all the revolving credit facility covenants and expect to remain in compliance throughout the next 12-month period. As defined by the revolving credit facility, our current ratio was 3.3 and our leverage ratio was 1.9 as of June 30, 2017.

In May 2017, we replaced our $11.7 million irrevocable standby letter of credit that we held in favor of a third-party transportation service provider for surety of an existing firm transportation obligation with a $9.3 million deposit, which is classified as restricted cash and is included in other assets on the condensed consolidated balance sheet. As of June 30, 2017, available funds under our revolving credit facility were $700 million based on our elected commitment level.

NOTE 9 - OTHER ACCRUED EXPENSES

Other Accrued Expenses. The following table presents the components of other accrued expenses as of:



	June 30, 2017		December 31, 2016
	(in thousands)

Employee benefits	$	12,148	$	22,282
Asset retirement obligations	12,938		9,775
Other	4,853		6,568
Other accrued expenses	$	29,939	$	38,625

NOTE 10 - 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 percent of the fair value of the leased vehicles at inception of the lease.

The following table presents vehicles under capital lease as of:



	June 30, 2017			December 31, 2016
	(in thousands)
Vehicles	$	5,097		$	2,975
Accumulated depreciation	(1,240		)	(776		)
	$	3,857		$	2,199

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PDC ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017

(unaudited)

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 June 30,	Amount
	(in thousands)
2018	$	1,836
2019	1,527
2020	1,195
	4,558
Less executory cost	(189		)
Less amount representing interest	(491		)
Present value of minimum lease payments	$	3,878

Short-term capital lease obligations	$	1,474
Long-term capital lease obligations	2,404
	$	3,878

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

NOTE 11 - 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 December 31, 2016	$	92,387
Obligations incurred with development activities	2,415
Accretion expense	3,434
Obligations discharged with asset retirements	(7,431		)
Balance at June 30, 2017	90,805
Less current portion	(12,938		)
Long-term portion	$	77,867

Our estimated asset retirement obligations liability is based on historical experience in plugging and abandoning wells, estimated economic lives and estimated plugging and abandonment costs 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. As of June 30, 2017, the credit-adjusted risk-free rates used to discount our plugging and abandonment liabilities ranged from 6.5 percent to 8.2 percent. 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 12 - COMMITMENTS AND CONTINGENCIES

Firm Transportation and Processing Agreements. We enter into contracts that provide firm transportation and processing 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, royalty, and overriding royalty interest owners whose volumes we market on their behalf. Our condensed consolidated statements of operations reflect our share of these firm transportation and processing costs. These contracts require us to pay these transportation and processing charges whether or not the required volumes are delivered.

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PDC ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017

(unaudited)

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



	For the Twelve Months Ending June 30,
Area	2018		2019		2020		2021		2022 and Through Expiration		Total		Expiration Date

Natural gas (MMcf)
Wattenberg Field	—		9,734		18,849		18,798		79,979		127,360		March 31, 2026
Delaware Basin	14,600		14,600		14,640		7,360		—		51,200		December 31, 2020
Gas Marketing	7,117		7,117		7,136		7,117		8,021		36,508		August 31, 2022
Utica Shale	2,737		2,737		2,745		2,737		5,709		16,665		July 22, 2023
Total	24,454		34,188		43,370		36,012		93,709		231,733

Crude oil (MBbls)
Wattenberg Field	2,413		2,414		2,420		—		—		7,247		June 30, 2020

Dollar commitment (in thousands)	$	18,583	$	28,104	$	36,564	$	22,665	$	81,560	$	187,476

In December 2016, in anticipation of our future drilling activities in the Wattenberg Field, we entered into a facilities expansion agreement with our primary midstream provider to expand and improve its natural gas gathering pipelines and processing facilities. The midstream provider is expected to construct a new 200 MMcfd cryogenic plant. We will be bound to the volume requirements in this agreement on the first day of the calendar month after the actual in-service date of the plant, which in the above table is estimated to be in October 2018. The agreement requires a baseline volume commitment, consisting of our gross wellhead volume delivered in November 2016, to this midstream provider and an incremental wellhead volume commitment of 51.5 MMcfd for seven years. We may be required to pay a shortfall fee for any volumes under the 51.5 MMcfd incremental commitment. Any shortfall of this volume commitment may be offset by additional third party producers’ volumes sold to the midstream provider that are greater than a certain total baseline volume. We are also required for the first three years of the contract to guarantee a certain target profit margin to the midstream provider on these incremental volumes. We expect that our development plan will support the utilization of that capacity.

In April 2017, we entered into a transportation service agreement for delivery of 40,000 dekatherms per day of our Delaware Basin natural gas production to the Waha market hub in West Texas.

For each of the three and six months ended June 30, 2017, commitments for long-term transportation volumes, net to our interest, for Wattenberg Field crude oil, Delaware Basin natural gas, and Utica Shale natural gas were $2.6 million and $4.8 million, respectively, and were recorded in transportation, gathering, and processing expense in our condensed consolidated statements of operations. For each of the three and six months ended June 30, 2016, commitments for long-term transportation volumes for Wattenberg Field crude oil and Utica Shale natural gas were $2.3 million and $4.7 million, respectively.

During the three and six months ended June 30, 2017, long-term firm transportation costs for our gas marketing business associated with the commitments shown above were $0.9 million and $1.7 million, respectively, and were recorded in other expenses in our condensed consolidated statements of operations. During the three and six months ended June 30, 2016, long-term firm transportation costs for our gas marketing business associated with the commitments shown above were $0.9 million and $1.7 million, respectively.

Litigation and Legal Items. The Company is involved in various legal proceedings. The Company reviews 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 the best interests of the Company. Management has provided the necessary estimated accruals in the accompanying balance sheets where deemed appropriate for litigation and legal related items that are ongoing and not yet concluded. However, the liability ultimately incurred with respect to a matter may exceed the related accrual. Although the results cannot be known with certainty, we believe that the ultimate results of such proceedings will not have a material adverse effect on our financial position, results of operations, or liquidity.

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PDC ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017

(unaudited)

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 periodic reviews and simulated drills to identify changes in our environmental risk profile. Liabilities are recorded when environmental damages resulting from past events are probable and the costs can be reasonably estimated. Except as discussed herein, we are not aware of any environmental claims existing as of June 30, 2017 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. However, the liability ultimately incurred with respect to a matter may exceed the related accrual. Accrued environmental liabilities are recorded in other accrued expenses on the condensed consolidated balance sheets.

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 Wattenberg Field production facilities in the Denver-Julesburg Basin of Colorado. The Information Request focuses 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 with the requested data in January 2016.

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 (“CDPHE”) 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 at 65 facilities consistent with applicable standards under Colorado law.

For more than a year, we held a series of meetings with the EPA, Department of Justice (“DOJ”) and CDPHE on the above matters. On June 26, 2017, the DOJ on behalf of the EPA and the State of Colorado filed a complaint against us based on the above matters. We continue to schedule meetings with these agencies in working toward a resolution of the matters. The ultimate outcome related to these combined actions is not known at this time.

NOTE 13 - COMMON STOCK

Sale of Equity Securities

During December 2016, we issued 9.4 million shares of our common stock as partial consideration for 100 percent of the common stock of Arris Petroleum and for the acquisition of certain Delaware Basin properties. Pursuant to the terms of previously-disclosed lock-up agreements, these shares were restricted for sale. The lock-up period ended on June 4, 2017. We have registered the 9.4 million shares of our common stock for resale.

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 June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
	(in thousands)

Stock-based compensation expense	$	5,372		$	6,444		$	9,826		$	11,126
Income tax benefit	(2,010		)	(2,452		)	(3,676		)	(4,233		)
Net stock-based compensation expense	$	3,362		$	3,992		$	6,150		$	6,893

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PDC ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017

(unaudited)

Stock Appreciation Rights

The stock appreciation right ("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.

The Compensation Committee of our Board of Directors awarded SARs to our executive officers during the six months ended June 30, 2017 and 2016. The fair value of each SAR award was estimated on the date of grant using a Black-Scholes pricing model using the following assumptions:



	Six Months Ended June 30,
	2017			2016

Expected term of award (in years)	6			6
Risk-free interest rate	2.0		%	1.8		%
Expected volatility	53.3		%	54.5		%
Weighted-average grant date fair value per share	$	38.58		$	26.96

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 the six months ended June 30, 2017:



	Number of SARs	Weighted-Average Exercise Price		Average Remaining Contractual Term (in years)	Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2016	244,078	$	41.36	6.9	$	7,620
Awarded	54,142	74.57		—	—
Outstanding at June 30, 2017	298,220	47.39		7.0	1,158
Exercisable at June 30, 2017	186,248	39.38		5.8	1,093

Total compensation cost related to SARs granted and not yet recognized in our condensed consolidated statement of operations as of June 30, 2017 was $2.8 million. The cost is expected to be recognized over a weighted-average period of 2.1 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.

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PDC ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017

(unaudited)

The following table presents the changes in non-vested time-based awards to all employees, including executive officers, for the six months ended June 30, 2017:



	Shares		Weighted-Average Grant Date Fair Value

Non-vested at December 31, 2016	479,642		$	56.09
Granted	248,946		67.02
Vested	(202,427	)	56.43
Forfeited	(5,311	)	67.20
Non-vested at June 30, 2017	520,850		61.06

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



	As of/Six Months Ended June 30,
	2017		2016
	(in thousands, except per share data)

Total intrinsic value of time-based awards vested	$	13,103	$	13,314
Total intrinsic value of time-based awards non-vested	22,454		31,506
Market price per common share as of June 30,	43.11		57.61
Weighted-average grant date fair value per share	67.02		57.11

Total compensation cost related to non-vested time-based awards and not yet recognized in our condensed consolidated statements of operations as of June 30, 2017 was $25.7 million. This cost is expected to be recognized over a weighted-average period of 2.1 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.

The Compensation Committee of our Board of Directors awarded a total of 28,069 market-based restricted shares to our executive officers during the six months ended June 30, 2017. In addition to continuous employment, the vesting of these shares is contingent on our total stockholder return ("TSR"), which is essentially our 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, 2019, and can result in a payout between 0 percent and 200 percent 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:



	Six Months Ended June 30,
	2017			2016

Expected term of award (in years)	3			3
Risk-free interest rate	1.4		%	1.2		%
Expected volatility	51.4		%	52.3		%
Weighted-average grant date fair value per share	$	94.02		$	72.54

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.

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PDC ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017

(unaudited)

The following table presents the change in non-vested market-based awards during the six months ended June 30, 2017:



	Shares	Weighted-Average Grant Date Fair Value per Share

Non-vested at December 31, 2016	48,420	$	64.97
Granted	28,069	94.02
Non-vested at June 30, 2017	76,489	75.63

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



	As of /Six Months Ended June 30,
	2017		2016
	(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	3,297		4,871
Market price per common share as of June 30,	43.11		57.61
Weighted-average grant date fair value per share	94.02		72.54

Total compensation cost related to non-vested market-based awards, not yet recognized in our condensed consolidated statements of operations as of June 30, 2017, was $3.4 million. This cost is expected to be recognized over a weighted-average period of 2.1 years.

Treasury Share Purchases

In June 2010, our stockholders approved a long-term equity compensation plan for our employees and non-employee directors (the "2010 Plan"). In accordance with the 2010 Plan, as amended in June 2013, up to 3,000,000 new shares of our common stock are authorized for issuance. Shares granted may be either authorized but unissued shares, treasury shares, or any combination of these shares. Additionally, the 2010 Plan permits the reuse or reissuance of shares of common stock which were canceled, expired, forfeited or, in the case of SARs, paid out in the form of cash. In accordance with our stock-based compensation plans, employees and directors may surrender shares of our common stock to pay tax withholding obligations upon the vesting and exercise of share-based awards. Shares acquired that had been issued pursuant to the 2010 Plan are reissued for new grants. For shares reissued for new grants under the 2010 Plan, shares are recorded at cost and upon reissuance we reduce the carrying value of shares acquired and held pursuant to the 2010 Plan by the weighted-average cost per share with an offsetting charge to additional paid-in capital. As of December 31, 2016, we had 10,397 shares remaining available for reissuance pursuant to our 2010 plan. Additionally, as of December 31, 2016, we had 18,366 of shares of treasury stock related to a rabbi trust. During the six months ended June 30, 2017, we acquired 79,381 shares pursuant to our stock-based compensation plans for payment of tax liabilities, of which 46,822 shares were reissued and 42,956 shares are available for reissuance pursuant to our 2010 Plan.

Preferred Stock

We are authorized to issue 50,000,000 shares of preferred stock, par value $0.01 per share, which may be issued in one or more series, with such rights, preferences, privileges, and restrictions as shall be fixed by our Board from time to time. Through June 30, 2017, no preferred shares have been issued.

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PDC ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017

(unaudited)

NOTE 14 - 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 June 30,		Six Months Ended June 30,
	2017	2016	2017	2016
	(in thousands)

Weighted-average common shares outstanding - basic	65,859	46,742	65,804	44,175
Dilutive effect of:
Restricted stock	94	—	176	—
Other equity-based awards	66	—	86	—
Weighted-average common shares and equivalents outstanding - diluted	66,019	46,742	66,066	44,175

We reported a net loss for the three and six months ended June 30, 2016. As a result, our basic and diluted weighted-average common shares outstanding were the same for that period because the effect of the common share equivalents was anti-dilutive.

The following table presents the weighted-average common share equivalents excluded from the calculation of diluted earnings per share due to their anti-dilutive effect:



	Three Months Ended June 30,		Six Months Ended June 30,
	2017	2016	2017	2016
	(in thousands)

Weighted-average common share equivalents excluded from diluted earnings per share due to their anti-dilutive effect:
Restricted stock	376	768	119	745
Convertible notes	—	358	—	478
Other equity-based awards	1	103	10	105
Total anti-dilutive common share equivalents	377	1,229	129	1,328

In September 2016, we issued the 2021 Convertible Notes, which give the holders, at our election, the right to convert the aggregate principal amount into 2.3 million shares of our common stock at a conversion price of $85.39 per share. The 2021 Convertible Notes could be included in the diluted earnings per share calculation using the treasury stock method if the average market share price exceeds the $85.39 conversion price during the periods presented. During the three and six months ended June 30, 2017, the average market price of our common stock did not exceed the conversion price; therefore, shares issuable upon conversion of the 2021 Convertible Notes were not included in the diluted earnings per share calculation.

In November 2010, we issued $115.0 million aggregate principal amount of 3.25% convertible senior notes that were due in 2016 ("2016 Convertible Notes"), which gave the holders the right to convert the aggregate principal amount into 2.7 million shares of our common stock at a conversion price of $42.40 per share. The 2016 Convertible Notes matured in May 2016. Prior to maturity, the 2016 Convertible Notes were included in the diluted earnings per share calculation using the treasury stock method when the average market share price exceeded the $42.40 conversion price during the periods presented.

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PDC ENERGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2017

(unaudited)

NOTE 15 - SUBSIDIARY GUARANTOR

Our subsidiary PDC Permian, Inc. guarantees our obligations under our publicly-registered Notes. The following presents the condensed consolidating financial information separately for:



(i)	PDC Energy, Inc. ("Parent"), the issuer of the guaranteed obligations, including non-material subsidiaries;
(ii)	PDC Permian, Inc., the guarantor subsidiary ("Guarantor"), as specified in the indentures related to our Notes;
(iii)	Eliminations representing adjustments to (a) eliminate intercompany transactions between or among Parent, Guarantor, and our other subsidiaries and (b) eliminate the investments in our subsidiaries;
(iv)	Parent and subsidiaries on a consolidated basis ("Consolidated").

The Guarantor is 100% owned by the Parent beginning in December 2016. The Notes are fully and unconditionally guaranteed on a joint and several basis by the Guarantor. The guarantee is subject to release in limited circumstances only upon the occurrence of certain customary conditions. Each entity in the condensed consolidating financial information follows the same accounting policies as described in the notes to the condensed consolidated financial statements.

The following condensed consolidating financial statements have been prepared on the same basis of accounting as our condensed consolidated financial statements. Investments in subsidiaries are accounted for under the equity method. Accordingly, the entries necessary to consolidate the Parent and Guarantor are reflected in the eliminations column.



	Condensed Consolidating Balance Sheets
	June 30, 2017
	Parent		Guarantor		Eliminations			Consolidated
	(in thousands)
Assets
Current assets	$	381,313	$	14,905	$	—		$	396,218
Properties and equipment, net	1,945,252		2,220,320		—			4,165,572
Intercompany receivable	120,106		—		(120,106		)	—
Investment in subsidiaries	1,733,615		—		(1,733,615		)	—
Goodwill	—		56,331		—			56,331
Noncurrent assets	37,966		841		—			38,807
Total Assets