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 transactions contemplated by the Noble exchange agreements are 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 liquidity;balance sheet attributes; estimated crude oil, natural gas and natural gas liquids (“NGLs”) reserves, including 2015 year-end reserves; expected 2015 capital forecast allocations, including revised capital and production forecasts and that we expect to meet or exceed the high end of our range; anticipated increased 2015 capital projects and expenditures; expected year-end exit rates; the impact of prolonged depressed commodity prices; the Utica Shale impairmentprices, including potentially reduced production and other potential future impairments;associated cash flow; anticipated capital projects, expenditures and opportunities, including our expectation that 2016 cash flows from operations will approximate cash flows from investing activities; 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 2015 capital program and sources of that funding; expected positive net settlements on derivatives in the second half of 2016; that we expect quarter-over-quarter production growth; future exploration, drilling and development activities, including ournon-operated activity, the number of drilling rigs we expect to run and lateral lengths of wells; expected rig count in both the Utica Shale2016 production and Wattenberg Field; expectationcash flow ranges and timing of cash flows in 2015 and 2016; potential additional revisions to our 2015 capital and production forecast; anticipated reductions in our 2015 cost structure; the expiration of certain leases and our current development plan in the Utica Shale;turn-in-lines; our evaluation method of our customers' and derivative counterparties' credit risk, including certain of our gas marketing customers; our expected positive net settlements on our derivative positions and effect on cash flow in 2015;risk; effectiveness of our derivative program in providing a degree of price stability; the impactpotential for future impairments; expected sustained relief of high line pressures and the timing, availability, cost and effect of additional midstream facilities and services going forward; expected differentials;gathering system pressure; compliance with debt covenants; expected funding sources for anticipated net settlement of our 3.25% convertibleand senior notes due 2016; thecovenants; impact of litigation on our results of operations and financial position; that we do not expect to pay dividends in the foreseeable future; our belief that certain proposed initiatives in Colorado may not qualify to be included on the ballot in 2016; 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 quarterly materials, we may use the terms “outlook,” “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. In additionBecause such statements relate to beingevents or conditions further in the future, they are subject to additionalincreased levels of uncertainty generally, forward-looking statements regarding such prospective matters do not necessarily reflect the outcomes we view as the most likely to occur, but instead are shown to illustrate aspects of our business in the context of a variety of scenarios we believe to be plausible.uncertainty.

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

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. As of SeptemberJune 30, 2015,2016, we owned an interest in approximately 2,9503,000 gross wells. We are engaged in two business segments: Oil and Gas Exploration and Production and Gas Marketing. In October 2014, we sold our entire 50% ownership interest in our joint venture, PDCM, to an unrelated third-party.

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 and, for the three and nine months ended September 30, 2014, our proportionate share of PDCM.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 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 August 2015,March 2016, the FASB deferredissued an update to the effective datestandard intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations when recognizing revenue. The revenue standard tois 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 will explicitly requirerequires 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 guidancestandard is not expected to have a significant impact on our condensed consolidated financial statements.

In November 2014,February 2016, the FASB issued an accounting update to accounting for derivativesaimed at increasing the transparency and hedging instruments. The update clarifies how current accounting guidance should be interpreted in evaluatingcomparability among organizations by recognizing lease assets and liabilities on the economic characteristicsbalance sheet and risksdisclosing key information about related leasing arrangements. For leases with terms of a host contract in a hybrid financial instrument that is issued in the form of a share. Specifically,more than 12 months, the accounting update clarifies thatrequires lessees to recognize an entity should consider all relevant termsasset for its right to use the underlying asset and features,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 embedded derivative feature being evaluated for bifurcation, in evaluatingpresentation of expenses and cash flows, will depend upon the natureclassification of the host contract. Furthermore, the update clarifies that no single termlease as either a finance or feature would necessarily determine the economic characteristics and risks of the host contract. Rather, the nature of the host contract depends upon the economic characteristics and risks of the entire hybrid financial instrument.operating lease. The assessment of the substance of the relevant terms and features should incorporate a consideration of the characteristics of the terms and features themselves, the circumstances under which the hybrid financial instrument was issued or acquired, and the potential outcomes of the hybrid financial instrument, as well as the likelihood of those potential outcomes. The accounting updateguidance is effective for public entities for fiscal years, and interim periods within those fiscal years beginning after December 15, 2015. Early2018, and interim periods within those years, with early adoption permitted, and is permitted.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 January 2015,March 2016, the FASB issued newan 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 eliminating from current accounting guidance the concept of extraordinary items, which, among other things, required an entityis effective for fiscal years beginning after December 15, 2016, and interim periods within those years, with early adoption permitted. We expect to segregate extraordinary items considered to be unusual and infrequent from the results of ordinary operations and show the item separatelyadopt this standard in the income statement, netfourth quarter of tax, after income from continuing operations. This guidance2016. Adoption of this standard is not expected to have a significant impact on our condensed consolidated financial statements.

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.

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:

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

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.contracts during the periods covered by this report.

    

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

 

The carrying value of our capital lease obligations approximates fair value as it representsdue to the present valuevariable nature of future lease payments.the imputed interest rates and the duration of the related vehicle lease.

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.

We have not elected not 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 impact of our derivative instruments on our condensed consolidated statements of operations:

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:

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

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

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 continuing operationsthe three and six months ended June 30, 2016 was a 37.9% and 37.5% benefit on loss compared to a 39.1% and 39.4% benefit on loss for the three and ninesix months ended SeptemberJune 30, 2015 was a 33.8% and 36.3% benefit on loss, respectively, compared to a 39.6% and 40.5% provision on income for the three and nine months ended September 30, 2014, respectively.

As of SeptemberJune 30, 2015, we had2016, 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 voluntary participationto voluntarily participate in the Internal Revenue Service’sService's ("IRS") Compliance Assurance Program for the 20142015 and 20152016 tax years. WeWith respect to the 2014 tax year, we have receivedagreed to a partial acceptance “no change” notice frompost filing adjustment with the IRS which resulted in an immaterial tax payment for our filedthe 2014 tax year. The IRS has fully accepted the 2014 federal tax return, and expect to receive a full acceptance notice after the IRS’s post filing review is completed.as adjusted.

As of SeptemberJune 30, 2015,2016, we were in compliance with all covenants related to the Convertible Notes and the 2022 Senior Notes and expect to remain in compliance throughout the next 12-month period.

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 1.00 to 1.00 and (b) not exceed a maximum leverage ratio of 4.25 to 1.00. As of SeptemberJune 30, 2015,2016, we were in compliance with all the revolving credit facility covenants and expect to remain in compliance throughout the next 12-month period.

Beginning in the first quarter of 2015, we enteredWe periodically enter into non-cancelable lease agreements for vehicles utilized by our operations and field personnel. Each lease agreement has a term of three years and isThese leases are being accounted for as a capital lease,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 SeptemberJune 30, 2015:2016:

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:

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.

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:

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