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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 JuneSeptember 30, 2017

or

£ 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
logo123114a09.jpg
PDC ENERGY, INC.
(Exact name of registrant as specified in its charter)

Delaware95-2636730
(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: 65,865,44165,872,790 shares of the Company's Common Stock ($0.01 par value) were outstanding as of JulyOctober 20, 2017.


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PDC ENERGY, INC.


TABLE OF CONTENTS

 PART I – FINANCIAL INFORMATION Page
    
Item 1.Financial Statements  
  
  
  
  
  
Item 2. 
Item 3. 
Item 4. 
    
PART II – OTHER INFORMATION
    
Item 1. 
Item 1A. 
Item 2. 
Item 3. 
Item 4. 
Item 5. 
Item 6. 
    
  




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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:the closing of pending transactions and the effects of such transactions, including the fact that the pending acquisition of certain properties owned by Bayswater Exploration & Production, LLC and certain related parties and the pending acreage exchanges are subject to continuing diligence between the parties and may not occur within the expected timeframe or we may not successfully close such transactions; the potential sale of our Utica Shale properties and the timing of such sale; the level of non-operated well activity following the pending acreage exchanges; 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; potential future impairments; the finalization of a consent decree resolving pending litigation; rates of return; operational enhancements and efficiencies; management of lease expiration issues; financial ratios; and midstream capacity and related curtailments.curtailments and the estimated in-service date of the facilities being constructed by our midstream providers.

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 termsterm “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 recentpending acquisitions and acreage exchanges in the Delaware Basin;Wattenberg Field;
increases or changes in operating costs, severance and ad valorem taxes, and increases or changes in drilling, completion, and facilities costs;
availability of supplies, materials, contractors, and services that may delay the drilling or completion of our wells;
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;


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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;requirements;
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 September 30, 2017 December 31, 2016
Assets        
Current assets:        
Cash and cash equivalents $202,291
 $244,100
 $136,429
 $244,100
Accounts receivable, net 135,203
 143,392
 167,276
 143,392
Fair value of derivatives 52,105
 8,791
 22,916
 8,791
Prepaid expenses and other current assets 6,619
 3,542
 8,081
 3,542
Total current assets 396,218
 399,825
 334,702
 399,825
Properties and equipment, net 4,165,572
 4,008,266
 3,882,700
 4,002,994
Assets held-for-sale, net 41,484
 5,272
Fair value of derivatives 16,397
 2,386
 4,605
 2,386
Goodwill 56,331
 62,041
 
 62,041
Other assets 22,410
 13,324
 43,796
 13,324
Total Assets $4,656,928
 $4,485,842
 $4,307,287
 $4,485,842
        
Liabilities and Stockholders' Equity        
Liabilities        
Current liabilities:        
Accounts payable $152,492
 $66,322
 $164,080
 $66,322
Production tax liability 35,296
 24,767
 36,954
 24,767
Fair value of derivatives 10,138
 53,595
 25,987
 53,595
Funds held for distribution 86,846
 71,339
 94,387
 71,339
Accrued interest payable 15,955
 15,930
 18,929
 15,930
Other accrued expenses 29,939
 38,625
 33,451
 38,625
Total current liabilities 330,666
 270,578
 373,788
 270,578
Long-term debt 1,049,004
 1,043,954
 1,051,571
 1,043,954
Deferred income taxes 452,028
 400,867
 326,472
 400,867
Asset retirement obligations 77,867
 82,612
 78,188
 82,612
Fair value of derivatives 2,311
 27,595
 7,261
 27,595
Other liabilities 30,610
 37,482
 43,405
 37,482
Total liabilities 1,942,486
 1,863,088
 1,880,685
 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
Common shares - par value $0.01 per share, 150,000,000 authorized, 65,928,295 and 65,704,568 issued as of September 30, 2017 and December 31, 2016, respectively 659
 657
Additional paid-in capital 2,495,940
 2,489,557
 2,500,532
 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)
Retained earnings (deficit) (70,933) 134,208
Treasury shares - at cost, 62,772 and 28,763
as of September 30, 2017 and December 31, 2016, respectively
 (3,656) (1,668)
Total stockholders' equity 2,714,442
 2,622,754
 2,426,602
 2,622,754
Total Liabilities and Stockholders' Equity $4,656,928
 $4,485,842
 $4,307,287
 $4,485,842


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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, Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016 2017 2016 2017 2016
Revenues                
Crude oil, natural gas, and NGLs sales $213,602
 $110,841
 $403,294
 $186,208
 $232,733
 $141,805
 $636,027
 $328,013
Commodity price risk management gain (loss), net of settlements 57,932
 (92,801) 138,636
 (81,745) (52,178) 19,397
 86,458
 (62,348)
Other income 3,624
 2,057
 6,935
 6,465
 2,680
 2,688
 9,615
 9,153
Total revenues 275,158
 20,097
 548,865
 110,928
 183,235
 163,890
 732,100
 274,818
Costs, expenses and other                
Lease operating expenses 20,028
 13,675
 39,817
 29,005
 25,353
 14,001
 65,170
 43,006
Production taxes 15,042
 6,043
 27,441
 10,114
 15,516
 9,568
 42,957
 19,682
Transportation, gathering and processing expenses 6,488
 4,465
 12,390
 8,506
 9,794
 5,048
 22,184
 13,554
General and administrative expense 29,531
 23,579
 55,846
 46,358
 29,299
 32,510
 85,145
 78,868
Exploration, geologic, and geophysical expense 1,033
 237
 1,987
 447
 41,908
 241
 43,895
 688
Depreciation, depletion and amortization 126,013
 107,014
 235,329
 204,402
 125,238
 112,927
 360,567
 317,329
Impairment of properties and equipment 27,566
 4,170
 29,759
 5,171
 252,740
 933
 282,499
 6,104
Impairment of goodwill 75,121
 
 75,121
 
Accretion of asset retirement obligations 1,666
 1,811
 3,434
 3,623
 1,472
 1,777
 4,906
 5,400
(Gain) loss on sale of properties and equipment (532) 260
 (692) 176
Gain on sale of properties and equipment (62) (219) (754) (43)
Provision for uncollectible notes receivable (40,203) 
 (40,203) 44,738
 
 (700) (40,203) 44,038
Other expenses 3,890
 2,125
 7,418
 4,703
 2,947
 3,092
 10,365
 7,795
Total costs, expenses and other 190,522
 163,379
 372,526
 357,243
 579,326
 179,178
 951,852
 536,421
Income (loss) from operations 84,636
 (143,282) 176,339
 (246,315)
Loss from operations (396,091) (15,288) (219,752) (261,603)
Interest expense (19,617) (10,672) (39,084) (22,566) (19,275) (20,193) (58,359) (42,759)
Interest income 768
 177
 1,008
 1,735
 479
 140
 1,487
 1,875
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)
Loss before income taxes (414,887) (35,341) (276,624) (302,487)
Income tax benefit 122,350
 12,032
 71,483
 112,198
Net loss $(292,537) $(23,309) $(205,141) $(190,289)
                
Earnings per share:                
Basic $0.63
 $(2.04) $1.33
 $(3.78) $(4.44) $(0.48) $(3.12) $(4.16)
Diluted $0.62
 $(2.04) $1.32
 $(3.78) $(4.44) $(0.48) $(3.12) $(4.16)
                
Weighted-average common shares outstanding:                
Basic 65,859
 46,742
 65,804
 44,175
 65,865
 48,839
 65,825
 45,741
Diluted 66,019
 46,742
 66,066
 44,175
 65,865
 48,839
 65,825
 45,741
                
 
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PDC ENERGY, INC.
Condensed Consolidated Statements of Cash Flows
(unaudited; in thousands)
 Six Months Ended June 30, Nine Months Ended September 30,
 2017 2016 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 loss $(205,141) $(190,289)
Adjustments to net loss to reconcile to net cash from operating activities:    
Net change in fair value of unsettled commodity derivatives (126,070) 201,825
 (64,307) 230,177
Depreciation, depletion and amortization 235,329
 204,402
 360,567
 317,329
Impairment of properties and equipment 29,759
 5,171
 282,499
 6,104
Impairment of goodwill 75,121
 
Exploratory dry hole costs 41,187
 
Provision for uncollectible notes receivable (40,203) 44,738
 (40,203) 44,038
Accretion of asset retirement obligations 3,434
 3,623
 4,906
 5,400
Non-cash stock-based compensation 9,826
 11,126
 14,587
 15,205
(Gain) loss on sale of properties and equipment (692) 176
Gain on sale of properties and equipment (754) (43)
Amortization of debt discount and issuance costs 6,399
 3,077
 9,628
 12,951
Deferred income taxes 50,767
 (102,319) (71,529) (114,136)
Other 670
 (1,287) 986
 (526)
Changes in assets and liabilities 6,582
 (5,754) 3,855
 34,621
Net cash from operating activities 263,197
 197,798
 411,402
 360,831
Cash flows from investing activities:        
Capital expenditures for development of crude oil and natural gas properties (334,406) (234,677) (528,850) (352,213)
Capital expenditures for other properties and equipment (2,299) (1,030) (3,740) (1,509)
Acquisition of crude oil and natural gas properties, including settlement adjustments 5,372
 
Acquisition of crude oil and natural gas properties, including settlement adjustments and deposit for pending acquisition (14,482) (100,000)
Proceeds from sale of properties and equipment 1,293
 4,903
 3,322
 4,945
Sale of promissory note 40,203
 
 40,203
 
Restricted cash (9,250) 
 (9,250) 
Sale of short-term investments 49,890
 
 49,890
 
Purchase of short-term investments (49,890) 
 (49,890) 
Net cash from investing activities (299,087) (230,804) (512,797) (448,777)
Cash flows from financing activities:        
Proceeds from issuance of equity, net of issuance cost 
 296,575
 
 855,072
Proceeds from senior notes 
 392,250
Proceeds from convertible senior notes 
 193,979
Proceeds from revolving credit facility 
 85,000
 
 85,000
Repayment of revolving credit facility 
 (122,000) 
 (122,000)
Redemption of convertible notes 
 (115,000) 
 (115,000)
Purchase of treasury shares (5,274) (4,055) (5,325) (5,106)
Other (645) 735
 (951) 593
Net cash from financing activities (5,919) 141,255
 (6,276) 1,284,788
Net change in cash and cash equivalents (41,809) 108,249
 (107,671) 1,196,842
Cash and cash equivalents, beginning of period 244,100
 850
 244,100
 850
Cash and cash equivalents, end of period $202,291
 $109,099
 $136,429
 $1,197,692
        
Supplemental cash flow information:        
Cash payments (receipts) for:        
Interest, net of capitalized interest $32,647
 $19,988
 $45,719
 $19,499
Income taxes (39) 167
 (2,623) 167
Non-cash investing and financing activities:        
Change in accounts payable related to purchases of properties and equipment $81,891
 $(28,999) $89,974
 $(31,497)
Change in asset retirement obligations, with a corresponding change to crude oil and natural gas properties, net of disposals 2,415
 843
 3,357
 1,137
Purchase of properties and equipment under capital leases 2,160
 1,074
 3,363
 1,231
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PDC ENERGY, INC.
Condensed Consolidated Statement of Equity
(unaudited; in thousands, except share data)

Common Stock   Treasury Stock    Common Stock   Treasury Stock    
Shares Amount Additional Paid-in Capital Shares Amount Retained Earnings Total Stockholders' EquityShares Amount Additional Paid-in Capital Shares Amount Retained Earnings (Deficit) Total Stockholders' Equity
                          
Balance, December 31, 201665,704,568
 $657
 $2,489,557
 (28,763) $(1,668) $134,208
 $2,622,754
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)
Net loss
 
 
 
 
 (205,141) (205,141)
Purchase of treasury shares
 
 
 (79,381) (5,274) 
 (5,274)
 
 
 (80,572) (5,325) 
 (5,325)
Issuance of treasury shares(46,822) 2
 (3,350) 46,822
 3,350
 
 2
(49,446) 
 (3,513) 49,446
 3,513
 
 
Non-employee directors' deferred compensation plan
 
 (2) (2,702) (169) 
 (171)
 
 
 (2,883) (176) 
 (176)
Issuance of stock awards, net of forfeitures269,358
 
 
 
 
 
 
273,173
 2
 (2) 
 
 
 
Stock-based compensation expense
 
 9,826
 
 
 
 9,826

 
 14,587
 
 
 
 14,587
Balance, June 30, 201765,927,104
 $659
 $2,495,940
 (64,024) $(3,761) $221,604
 $2,714,442
Other
 
 (97) 
 
 
 (97)
Balance, September 30, 201765,928,295
 $659
 $2,500,532
 (62,772) $(3,656) $(70,933) $2,426,602


PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JuneSeptember 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,During the third quarter of 2017, as part of plans to divest the Utica Shale properties, we engaged an investment banking group to assist inand began actively marketing themthe properties for sale; therefore, these properties will beare classified as held-for-sale upon meetingas they met the criteria for such classification induring 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 JuneSeptember 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 sixnine months ended JuneSeptember 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 balance sheet and 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 Adopted Accounting Standard

In January 2017, the FASB issued an accounting update to simplify the 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. Our annual evaluation of goodwill for impairment was expected to occur in the fourth quarter of 2017; however, we experienced an impairment triggering event as of September 30, 2017 and implemented the new guidance as part of the impairment evaluation. See the footnote titled Goodwill for a detailed description of the results of our impairment testing.

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 standard has been updated and now includes technical corrections. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an
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PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(unaudited)


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.period; we are adopting the standard effective January 1, 2018. The revenue standard can be adopted under the full retrospective method or simplified transitionmodified retrospective method. Entities are permittedIn order to adoptevaluate the impact that the adoption of the revenue standard early, beginningwill have on our consolidated financial statements, we are performing a comprehensive review of our significant revenue streams. The focus of this review includes, among other things, the identification of the significant contracts and other arrangements we have with annual reporting periods after December 15, 2016.our customers to identify performance obligations and principal versus agent considerations, and factors affecting the determination of transaction price. We are inalso reviewing our current accounting policies, procedures, and controls with respect to these contracts and arrangements to determine what changes, if any, may be required by the process of assessing potential impactsadoption of the newrevenue standard. We have determined that we will adopt the standard under the modified retrospective method. We have not made a complete determination regarding the impact that the adoption will have on our existing revenue recognition criteria,consolidated financial statements 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)


the time of this filing.

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 assessingcurrently evaluating 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 clarifying the definition of a business, with the objective of adding guidance to simplify the subsequent measurementassist entities with evaluating whether transactions should be accounted for as acquisitions or disposals 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/assets or interim assessments are still requiredbusinesses. This guidance is to be completed. The guidanceapplied using a prospective method and is effective for fiscal years beginning after December 15, 2019,2017, 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 andare currently evaluating the impact can be determined.these changes may have on our consolidated financial statements.

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.



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PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(unaudited)


NOTE 3 - BUSINESS COMBINATION

Delaware Basin Acquisition. On December 6, 2016, we closed on an acquisition which has beenwas accounted for as a business combination. The acquisition consisted of the purchase of stock of an entity and assets of other entities under common control. 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,adjustments. The total consideration to sellers was comprised of approximately $946.0 million in cash, including the payment of $40.0 million of debt of the sellersellers 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 estimatedpurchase accounting for the entity of which we acquired the stock reflected oil and gas assets that did not receive fair value step-up of the tax basis. As a result, a significant deferred income tax liability was calculated based on the acquired allocated fair value of the assets in excess of the tax basis of assets inside the entity. This calculation resulted in approximately $375.0 million of non-cash basis needing to be allocated to the acquired assets. No deferred tax liability was established for the calculated goodwill as the goodwill did not qualify as tax goodwill.

The final fair value allocation of the assets acquired and liabilities assumed in the acquisition are presented below are preliminary and subject toinclude 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.adjustments. The most significant item to be completed isduring the final purchase price allocation in the third quarter of 2017 was the final allocation of value to the per acre values acrossunproved oil and gas properties associated with the acquisition.acquired acreage. Adjustments to the preliminary purchase price primarily stem from additional information we obtained about facts and circumstances that existed at the acquisition date that impact the underlying value of certain assets acquired and liabilities assumed, including detailed lease terms, location of the acreage, and intent to develop the acreage as of the date of closing. There were a significant number of leases acquired with complex lease terms and evaluation of these terms and the timing of the lease expirations impacted the manner in which the final purchase price was allocated. Our final determination of the value of goodwill has been adjusted for all post-closing adjustments.

The details of the final purchase price and the allocation of the purchase price for the transaction, are presented below (in thousands):
 September 30, 2017
Acquisition costs: 
       Cash, net of cash acquired$905,962
       Retirement of seller's debt40,000
  Total cash consideration945,962
        Common stock, 9.4 million shares690,702
        Other purchase price adjustments426
  Total acquisition costs$1,637,090
  
Recognized amounts of identifiable assets acquired and liabilities assumed: 
Assets acquired: 
       Current assets$6,401
       Crude oil and natural gas properties - proved216,000
       Crude oil and natural gas properties - unproved1,697,000
       Infrastructure, pipeline, and other33,153
       Construction in progress12,323
       Goodwill75,121
Total assets acquired2,039,998
Liabilities assumed: 
       Current liabilities(24,496)
       Asset retirement obligations(3,705)
       Deferred tax liabilities, net(374,707)
Total liabilities assumed(402,908)
Total identifiable net assets acquired$1,637,090
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PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JuneSeptember 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 debt40,000
Total cash consideration945,962
        Common stock, 9.4 million shares690,702
        Other purchase price adjustments1,025
  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 - proved216,000
       Crude oil and natural gas properties - unproved1,721,334
       Infrastructure, pipeline, and other33,695
       Construction in progress12,148
       Goodwill56,331
Total assets acquired2,046,069
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. Within the unproven properties, the allocation of the value to the underlying leases also required significant judgment and was based on a combination of comparable market transactions, the term and conditions associated with the individual leases, our ability and intent to develop specific leases, and our initial assessment of the underlying relative value of the leases given our knowledge of the geology at the time of closing. These inputs require significant judgments and estimates by management at the time of the valuation and arewere 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 iswas calculated as the excess of the purchase price over the fair value of net assets acquired, including the additional value resulting from the creation of the deferred tax liability, 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.future, such as production from future development of additional producing zones. The amount of the final goodwill that was recorded on a preliminary basisin the third quarter of 2017 related to the Delaware Basin acquisition has decreased as compared towas $75.1 million and was higher than the initial estimated amount recorded as of December 31, 2016, due to customary purchase price allocations, primarily related to finalization of the aggregate acreage position acquired and the related lease terms and a refund fromfinal settlement with 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 iswas not expected to be deductible for income tax purposes.

The following table presents the changes in goodwill from the preliminary allocation at December 31, 2016, and the final allocation determined during the quarter ended September 30, 2017:
 Amount
 (in thousands)
  
Preliminary purchase price allocation$62,041
Adjustments13,080
Final purchase price allocation$75,121

See the footnote titled Goodwill for the details regarding the impairment of goodwill as of September 30, 2017.

NOTE 4 - PENDING ACQUISITION AND ACREAGE EXCHANGES

Pending Acquisition. In September 2017, we entered into an acquisition agreement to acquire certain assets from Bayswater Exploration & Production, LLC ("Bayswater") and certain related parties, pursuant to which, subject to the terms and conditions of the agreement, we have agreed to acquire approximately 8,300 net acres, 30 operated drilled uncompleted wells ("DUCs"), and an estimated 240 gross drilling locations, for approximately $210 million in cash, subject to certain pre- and post-closing adjustments. We plan to turn-in-line 18 of these DUCs at approximately year-end 2017, with the completion costs expected to be treated as an increase to the purchase price. Upon executing the purchase and sale agreement, we paid a $21 million deposit toward the purchase price into an escrow account, which is included in other assets on our September 30, 2017 condensed consolidated balance sheet. Assuming all conditions required for closing are met, the acquisition is expected to close in December 2017 and is expected to be funded by a combination of available cash and debt.

Pending Acreage Exchanges. In September 2017, we entered into an acreage exchange transaction to consolidate certain acreage positions in the core area of the Wattenberg Field. Pursuant to the transaction, we will exchange leasehold acreage with some limited in-process development wells. Upon closing, we expect to receive approximately 11,700 net acres in exchange for approximately 12,100 net acres with minimal cash exchanged between the parties. The difference in net acres is
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PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JuneSeptember 30, 2017
(unaudited)


primarily due to variances in working and net revenue interests. The acreage exchange is expected to close in the fourth quarter of 2017; however, there can be no assurance that conditions to closing will be satisfied.

In June 2017, we entered into an acreage exchange transaction that also involves the consolidation of certain acreage positions in the core area of the Wattenberg Field. Pursuant to the transaction, we will exchange leasehold acreage with some limited in-process development wells. Upon closing, we estimate that we will receive approximately 3,900 net acres in exchange for approximately 4,100 net acres with minimal cash exchanged between the parties. The difference in net acres is primarily due to variances in working and net revenue interests. This acreage exchange is also expected to close in the fourth quarter 2017; however, there can be no assurance that conditions to closing will be satisfied.


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PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(unaudited)


NOTE 5 - EXPLORATION, GEOLOGIC, AND GEOPHYSICAL EXPENSE

The following table presents the changes in goodwill:major components of exploration, geologic, and geophysical expense:

 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
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
 (in thousands)
        
Exploratory dry hole costs$41,187
 $
 $41,187
 $
Geological and geophysical costs, including seismic purchases463
 
 1,790
 
Operating, personnel and other258
 241
 918
 688
Total exploration, geologic, and geophysical expense$41,908
 $241
 $43,895
 $688
        

WithExploratory dry hole costs. During the creationthree and nine months ended September 30, 2017, two exploratory dry hole wells, associated lease costs, and related infrastructure assets in the Delaware Basin were expensed at a cost of goodwill from this transaction, we will perform our evaluation of goodwill for impairment annually or when a triggering event is deemed$41.2 million. The conclusion to have occurred. We evaluate goodwill for impairment by either performing a qualitative evaluation or a quantitative test, which involves comparing the estimated fair valueexpense these items was due to the carrying value. In either case,conclusion that the valuationacreage on which these wells were drilled was exploratory in nature and, following drilling, the lack of goodwill willhydrocarbon production necessary for the wells to be a significant estimate as such methods incorporate forward-looking assumptions and estimates.deemed economically viable.

NOTE 46 - PROPERTIES AND EQUIPMENT AND ASSETS HELD-FOR-SALE

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

June 30, 2017 December 31, 2016September 30, 2017 December 31, 2016
(in thousands)(in thousands)
Properties and equipment, net:      
Crude oil and natural gas properties      
Proved$3,842,942
 $3,499,718
$3,759,501
 $3,499,718
Unproved1,841,589
 1,874,671
1,559,717
 1,874,671
Total crude oil and natural gas properties5,684,531
 5,374,389
5,319,218
 5,374,389
Infrastructure, pipeline, and other94,654
 62,093
104,568
 62,093
Land and buildings15,274
 12,165
10,714
 6,392
Construction in progress171,600
 122,591
177,341
 122,591
Properties and equipment, at cost5,966,059
 5,571,238
5,611,841
 5,565,465
Accumulated DD&A(1,800,487) (1,562,972)(1,729,141) (1,562,471)
Properties and equipment, net$4,165,572
 $4,008,266
$3,882,700
 $4,002,994
      

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

Three Months Ended June 30, Six Months Ended June 30,Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 20162017 2016 2017 2016
(in thousands)(in thousands)

              
Impairment of unproved properties$27,463
 $1,084
 $29,565
 $2,053
$252,623
 $338
 $282,188
 $2,391
Amortization of individually insignificant unproved properties103
 54
 194
 86
117
 595
 311
 681
Impairment of crude oil and natural gas properties
27,566
 1,138
 29,759
 2,139
252,740
 933
 282,499
 3,072
Land and buildings
 3,032
 
 3,032

 
 
 3,032
Total impairment of properties and equipment$27,566
 $4,170
 $29,759
 $5,171
$252,740
 $933
 $282,499
 $6,104

During the three months ended JuneSeptember 30, 2017, we impaired certain unproved Delaware Basin leasehold positions totaling $27.0 million that expired duringrecorded a charge related to two exploratory dry holes we had drilled in the three months ending June 30, 2017, or are projected to expire between June 30, 2017 and December 31, 2017.  Subsequent to closing the acquisitionswestern area of our Culberson County acreage in the Delaware Basin, itas referenced previously.  We then assessed the impact of the dry holes and various factors related thereto, including (i) the operational and geologic data obtained, (ii) the
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PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(unaudited)


current increased cost environment for drilling and completion services in the Delaware Basin, (iii) our decreased future commodity price outlook, and (iv) the terms of  the related lease agreements.  Based on the results of this assessment, we concluded that the underlying geologic risk and the challenged economics of future capital expenditures reduced the likelihood that we would perform future development in this area over the remaining lease term for this acreage.  Accordingly, we recorded an impairment of $251.6 million covering approximately 13,400 acres during the third quarter of 2017.  The amount of the impairment of these unproved properties was based on the value assigned to individual lease acres in the final purchase price allocation of the business combination.  This allocation had included the consideration paid to the sellers, including the effect of the non-cash impact from the deferred tax liability created at the time of the acquisition. Due to the aforementioned events and circumstances in the third quarter of 2017, we evaluated our proved property for possible impairment and concluded that these assets were not impaired during the period.

Classification of Assets as Held-for-Sale. During the third quarter of 2017, as part of our plan to divest the Utica Shale properties, we engaged an investment banking group and began actively marketing the properties for sale; therefore, these properties are classified as held-for-sale as they met the criteria for such classification during the third quarter of 2017.

The following table presents balance sheet data related to assets held-for-sale, which include the Utica Shale properties, field office facilities, and a parcel of land that are being marketed for sale. Assets held-for-sale represents the assets that are expected to be sold, net of liabilities, that are expected to be assumed by the purchasers:    
 September 30, 2017 December 31, 2016
 (in thousands)
Assets   
  Properties and equipment, net$41,983
 $5,272
Total assets$41,983
 $5,272
    
Liabilities   
  Asset retirement obligation$499
 $
Total liabilities$499
 $
    
Net assets$41,484
 $5,272


NOTE 7 - GOODWILL

The final goodwill that resulted from the purchase price allocation of the assets acquired in the Delaware Basin was determined thatto be $75.1 million. With the creation of goodwill from this transaction, we expected to perform our evaluation of goodwill for impairment annually in the fourth quarter. However, primarily due to a combination of increases in per well development and operational costs and our drilling of two exploratory dry holes in the Delaware Basin since the time of the acquisition, in conjunction with our lower future commodity price outlook, we determined a triggering event had occurred in the quarter ended September 30, 2017. In addition to the factors mentioned above, we also considered our recent impairments of certain acreage tracts would not meetunproven leasehold costs, and the impact of these items on our internal expectations for acceptable rates of return duereturn. We evaluated goodwill for impairment by performing a quantitative test, which involves comparing the estimated fair value of the goodwill asset group, which we define as the Delaware Basin, to the carrying value. We determined the fair value of the goodwill at September 30, 2017 by using an estimated after-tax future discounted cash flow analysis, along with a combination of weakening commodity prices; higher per well developmentmarket-based pricing factors for similar acreage, reserve valuation techniques, and operational costs;other fair value considerations. The discounted cash flow analysis used to estimate fair value was based on known or knowable information at the interim measurement date. Fair value determinations require considerable judgment and updated technical analysis.  Asare sensitive to changes in underlying assumptions and factors. The quantitative test resulted in a result, we allowed or expect to allow certain acreage to expire, anddetermination that a full impairment charge of $75.1 million was required; therefore, the charge was recorded in other circumstances we were unable to obtain necessary lease term extensions.the quarter ended September 30, 2017.
 

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PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JuneSeptember 30, 2017
(unaudited)


NOTE 58 - 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 JuneSeptember 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 12,89614,337 MBbls of crude oil, 82,03069,715 BBtu of natural gas, and 643412 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 Fair Value
Derivative instruments:Derivative instruments: Condensed consolidated balance sheet line item June 30, 2017 December 31, 2016Derivative instruments: Condensed consolidated balance sheet line item September 30, 2017 December 31, 2016
 (in thousands) (in thousands)
Derivative assets:Current    Current    
Commodity derivative contracts Fair value of derivatives $49,540
 $8,490
Commodity derivative contracts Fair value of derivatives $19,042
 $8,490
Basis protection derivative contracts Fair value of derivatives 2,565
 301
Basis protection derivative contracts Fair value of derivatives 3,874
 301
 52,105
 8,791
 22,916
 8,791
Non-current    Non-current    
Commodity derivative contracts Fair value of derivatives 15,051
 1,123
Commodity derivative contracts Fair value of derivatives 3,942
 1,123
Basis protection derivative contracts Fair value of derivatives 1,346
 1,263
Basis protection derivative contracts Fair value of derivatives 663
 1,263
 16,397
 2,386
 4,605
 2,386
Total derivative assetsTotal derivative assets $68,502
 $11,177
Total derivative assets $27,521
 $11,177
        
Derivative liabilities:Current    Current    
Commodity derivative contracts Fair value of derivatives $9,943
 $53,565
Commodity derivative contracts Fair value of derivatives $25,895
 $53,565
Basis protection derivative contracts Fair value of derivatives 195
 30
Basis protection derivative contracts Fair value of derivatives 92
 30
 10,138
 53,595
 25,987
 53,595
Non-current    Non-current    
Commodity derivative contracts Fair value of derivatives 2,311
 27,595
Commodity derivative contracts Fair value of derivatives 7,244
 27,595
 2,311
 27,595
Basis protection derivative contracts Fair value of derivatives 17
 
 7,261
 27,595
Total derivative liabilitiesTotal derivative liabilities $12,449
 $81,190
Total derivative liabilities $33,248
 $81,190

    
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PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JuneSeptember 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, Three Months Ended September 30, Nine Months Ended September 30,
Condensed consolidated statement of operations line item 2017 2016 2017 2016 2017 2016 2017 2016
 (in thousands) (in thousands)
Commodity price risk management gain, net                
Net settlements $12,015
 $53,301
 $12,566
 $120,132
 $9,585
 $47,728
 $22,151
 $167,859
Net change in fair value of unsettled derivatives 45,917
 (146,102) 126,070
 (201,877) (61,763) (28,331) 64,307
 (230,207)
Total commodity price risk management gain, net $57,932
 $(92,801) $138,636
 $(81,745) $(52,178) $19,397
 $86,458
 $(62,348)
                

Net settlements of commodity derivatives decreased for the three and sixnine months ended JuneSeptember 30, 2017 as compared to the three and sixnine months ended JuneSeptember 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 sixnine months ended JuneSeptember 30, 2017 reflect derivative instruments entered into since 2015, which more closely approximate recent realized prices.  Based upon theon forward strip pricing at JuneSeptember 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
As of September 30, 2017 Derivative instruments, recorded in condensed consolidated balance sheet, gross Effect of master netting agreements Derivative instruments, net
 (in thousands) (in thousands)
Asset derivatives:            
Derivative instruments, at fair value $68,502
 $(10,974) $57,528
 $27,521
 $(15,010) $12,511
            
Liability derivatives:            
Derivative instruments, at fair value $12,449
 $(10,974) $1,475
 $33,248
 $(15,010) $18,238
            
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
JuneSeptember 30, 2017
(unaudited)


NOTE 69 - 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, 2016September 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)
  TotalSignificant 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)(in thousands)
Assets:                      
Total assets$58,226
 $10,276
 $68,502
 $6,350
 $4,827
 $11,177
$24,553
 $2,968
 $27,521
 $6,350
 $4,827
 $11,177
Total liabilities(10,792) (1,657) (12,449) (66,789) (14,401) (81,190)(23,811) (9,437) (33,248) (66,789) (14,401) (81,190)
Net asset (liability)$47,434
 $8,619
 $56,053
 $(60,439) $(9,574) $(70,013)$742
 $(6,469) $(5,727) $(60,439) $(9,574) $(70,013)
                      
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PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JuneSeptember 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, Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016 2017 2016 2017 2016
 (in thousands) (in thousands)
Fair value of Level 3 instruments, net asset (liability) beginning of period $2,316
 $73,195
 $(9,574) $91,288
 $8,619
 $27,375
 $(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) (14,075) 4,234
 8,547
 (16,023)
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) (1,013) (15,587) (5,442) (59,243)
Fair value of Level 3 instruments, net asset end of period $8,619
 $27,375
 $8,619
 $27,375
 $(6,469) $16,022
 $(6,469) $16,022
                
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) $(8,711) $(2,240) $(583) $(8,273)
                

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 23 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 JuneSeptember 30, 2017.
  Estimated Fair Value Percent of Par
  (in millions)  
Senior notes:   
 2021 Convertible Notes$180.8
 90.4%
 2022 Senior Notes520.6
 104.1%
 2024 Senior Notes406.0
 101.5%
  Estimated Fair Value Percent of Par
  (in millions)  
Senior notes:   
 2021 Convertible Notes$196.3
 98.1%
 2022 Senior Notes521.9
 104.4%
 2024 Senior Notes412.5
 103.1%

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
JuneSeptember 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 JuneSeptember 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 JuneSeptember 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.


NOTE 10 - NOTE RECEIVABLE

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 varyingvariable 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. 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.issuer's assets. 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 the PIK Interest continued to be doubtful and the full valuation allowance on the Promissory Note remained appropriate as of that date. This evaluation assumed that 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,second quarter of 2017.

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PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(unaudited)


NOTE 711 - 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 sixnine months ended JuneSeptember 30, 2017 was 37.3were 29.5 percent and 36.825.8 percent expensebenefit on income,loss, respectively, compared to 37.934.0 percent and 37.537.1 percent benefit on loss for the three and sixnine months ended JuneSeptember 30, 2016. The most significant element related to the decrease in the effective income tax rate was the impact from the $75.1 million impairment of the goodwill in the quarter ended September 30, 2017. This goodwill did not have an associated deferred tax liability at the time it was created, therefore, no deferred tax benefit was realized upon the impairment of the goodwill. The effective income tax rates for the three and sixnine 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 JuneSeptember 30, 2017, are based upon a full year forecasted tax provisionbenefit on income and are greater thanloss. In addition to the statutory federalimpact from the goodwill impairment, the effective income tax rate primarily due tofor the three months ended September 30, 2017 includes discrete income tax benefits of $0.8 million for additional deductions and credits claimed on the filed 2016 federal and state income taxes, nondeductible officers’ compensationtax returns. The effective income tax rate for the nine months ended September 30, 2017 includes discrete income tax benefits of $1.8 million relating to the excess income tax benefit recognized with the vesting of stock awards and nondeductible lobbying expenses, partially offset by stock-based compensation$0.8 million for additional deductions and credits claimed on the filed 2016 federal and state tax deductions.returns. These discrete tax benefits during the three and nine months ended September 30, 2017 resulted in a 0.2 percent and 0.9 percent increase to our effective income tax rates. 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 sixnine months ended JuneSeptember 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 sixnine months ended JuneSeptember 30, 2016.

As of JuneSeptember 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 duringand partial acceptance of the six months ended Junerecently filed 2016 federal income tax return that is now going through the IRS CAP post-filing review process.

PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017.2017
(unaudited)


NOTE 812 - LONG-TERM DEBT

Long-term debt consisted of the following as of:
June 30, 2017 December 31, 2016September 30, 2017 December 31, 2016
(in thousands)(in thousands)
Senior notes:      
1.125% Convertible Notes due 2021:      
Principal amount$200,000
 $200,000
$200,000
 $200,000
Unamortized discount(33,952) (37,475)(32,153) (37,475)
Unamortized debt issuance costs(4,103) (4,584)(3,859) (4,584)
1.125% Convertible Notes due 2021, net of unamortized discount and debt issuance costs161,945
 157,941
163,988
 157,941
      
7.75% Senior Notes due 2022:      
Principal amount500,000
 500,000
500,000
 500,000
Unamortized debt issuance costs(5,882) (6,443)(5,602) (6,443)
7.75% Senior Notes due 2022, net of unamortized debt issuance costs494,118
 493,557
494,398
 493,557
      
6.125% Senior Notes due 2024:      
Principal amount400,000
 400,000
400,000
 400,000
Unamortized debt issuance costs(7,060) (7,544)(6,815) (7,544)
6.125% Senior Notes due 2024, net of unamortized debt issuance costs392,940
 392,456
393,185
 392,456
      
Total senior notes1,049,003
 1,043,954
1,051,571
 1,043,954
      
Revolving credit facility
 

 
Total long-term debt, net of unamortized discount and debt issuance costs$1,049,003
 $1,043,954
$1,051,571
 $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 NoteNotes have been capitalized as debt issuance costs. As of JuneSeptember 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
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PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(unaudited)


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.terms, and we completed the exchange offer in September 2017. 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 JuneSeptember 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$1.0 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, amendsamended 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.

In October 2017, we entered into a Sixth Amendment to the Third Amended and Restated Credit Agreement. The amendment amends the revolving credit facility to allow the borrowing base to increase above the maximum allowable borrowing capacity of $1.0 billion. We have elected to increase the fall 2017 borrowing base to $1.1 billion and maintain a $700 million commitment level as of the date of this report. As of September 30, 2017, available funds under our revolving credit facility were $700 million based on our elected commitment level.

As of JuneSeptember 30, 2017 and December 31, 2016, debt issuance costs related to our revolving credit facility were $7.5$6.8 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 JuneSeptember 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 JuneSeptember 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 0.500.5 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 JuneSeptember 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 leverage ratio was 1.8 and our current ratio was 3.3 and our leverage ratio was 1.92.9 as of JuneSeptember 30, 2017.
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PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(unaudited)

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 913 - OTHER ACCRUED EXPENSES

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

 June 30, 2017 December 31, 2016 September 30, 2017 December 31, 2016
 (in thousands) (in thousands)
        
Employee benefits $12,148
 $22,282
 $14,401
 $22,282
Asset retirement obligations 12,938
 9,775
 13,128
 9,775
Other 4,853
 6,568
 5,922
 6,568
Other accrued expenses $29,939
 $38,625
 $33,451
 $38,625
        

NOTE 1014 - 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 September 30, 2017 December 31, 2016
 (in thousands) (in thousands)
Vehicles $5,097
 $2,975
 $6,301
 $2,975
Accumulated depreciation (1,240) (776) (1,435) (776)
 $3,857
 $2,199
 $4,866
 $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
For the Twelve Months Ending September 30, Amount
 (in thousands) (in thousands)
2018 $1,836
 $2,207
2019 1,527
 1,617
2020 1,195
 1,758
 4,558
 5,582
Less executory cost (189) (258)
Less amount representing interest (491) (615)
Present value of minimum lease payments $3,878
 $4,709
  
  
Short-term capital lease obligations $1,474
 $1,768
Long-term capital lease obligations 2,404
 2,941
 $3,878
 $4,709

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.

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PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(unaudited)



NOTE 1115 - 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:
AmountAmount
(in thousands)(in thousands)
  
Balance at December 31, 2016$92,387
$92,387
Obligations incurred with development activities2,415
3,296
Accretion expense3,434
4,906
Revisions in estimated cash flows155
Obligations discharged with asset retirements(7,431)(8,929)
Balance at June 30, 201790,805
Balance at September 30, 201791,815
Less liabilities held for sale(499)
Less current portion(12,938)(13,128)
Long-term portion$77,867
$78,188
  
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 JuneSeptember 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 1216 - 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,    For the Twelve Months Ending September 30,   
Area 2018 2019 2020 2021 2022 and
Through
Expiration
 Total Expiration
Date
 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 
 16,760
 30,850
 31,025
 131,287
 209,922
 March 31, 2026
Delaware Basin 14,600
 14,600
 14,640
 7,360
 
 51,200
 December 31, 2020 14,600
 14,600
 14,640
 3,680
 
 47,520
 December 31, 2020
Gas Marketing 7,117
 7,117
 7,136
 7,117
 8,021
 36,508
 August 31, 2022 7,117
 7,117
 7,136
 7,117
 6,227
 34,714
 August 31, 2022
Utica Shale 2,737
 2,737
 2,745
 2,737
 5,709
 16,665
 July 22, 2023 2,738
 2,738
 2,745
 2,738
 5,016
 15,975
 July 22, 2023
Total 24,454
 34,188
 43,370
 36,012
 93,709
 231,733
  24,455
 41,215
 55,371
 44,560
 142,530
 308,131
 
                          
Crude oil (MBbls)                          
Wattenberg Field 2,413
 2,414
 2,420
 
 
 7,247
 June 30, 2020 2,413
 2,413
 1,812
 
 
 6,638
 June 30, 2020
                          
Dollar commitment (in thousands) $18,583
 $28,104
 $36,564
 $22,665
 $81,560
 $187,476
  $18,410
 $35,170
 $44,949
 $33,776
 $129,546
 $261,851
 
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PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(unaudited)


 
In December 2016, in anticipation of our future drilling activities in the Wattenberg Field, we entered into atwo facilities expansion agreementagreements with our primary midstream provider to expand and improve its natural gas gathering pipelines and processing facilities. The midstream provider is expected to construct atwo new 200 MMcfd cryogenic plant.plants. We will be bound to the volume requirements in this agreementthese agreements on the first day of the calendar month after the actual in-service date of the plant,plants, which in the above table is estimatedscheduled to be in October 2018. The agreement requires athe fourth quarter of 2018 for the first plant and April 2019 for the second plant. We are currently working with this midstream provider to identify opportunities to accelerate the completion of the first of these processing facilities. Both agreements require baseline volume commitment,commitments, consisting of our gross wellhead volume delivered in November 2016, to this midstream provider, and an incremental wellhead volume commitmentcommitments of 51.5 MMcfd and 33.5 MMcfd for the first and second agreements, respectively, for seven years. We may be required to pay a shortfall feefees for any volumes under the 51.5 MMcfd and 33.5 MMcfd incremental commitment.commitments. Any shortfall of thisthese volume commitmentcommitments 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 contractcontracts to guarantee a certain target profit margin to the midstream provider on these incremental volumes. We currently expect that our future development planplans will support the utilization of that capacity.the incremental commitments.

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 sixnine months ended JuneSeptember 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$7.4 million, respectively, and were recorded in transportation, gathering, and processing expenseexpenses in our condensed consolidated statements of operations. For each of the three and sixnine months ended JuneSeptember 30, 2016, commitments for long-term transportation volumes for Wattenberg Field crude oil and Utica Shale natural gas were $2.3$2.6 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$7.2 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 currently believe that the ultimate results of such proceedings will not have a material adverse effect on our financial position, results of operations, or liquidity.
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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 material environmental claims existing as of JuneSeptember 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 potential 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.

Clean Air Act Tentative Agreement and Related Consent Decree.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.Colorado ("DJ Basin"). The Information Request focusesfocused on historical operation and design information for 46 of our production facilities and asks that we conductrequested 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
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PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(unaudited)


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 continuecontinued to scheduleconduct meetings with these agencies in working toward a resolution of the matters. On September 28, 2017, the parties jointly filed for an extension of time for PDC to reply to the complaint. The ultimateextension was requested because the parties reached an agreement to resolve the case subject to final approval by the appropriate persons within the federal government and state government, as well as outcome related to these combined actions is not known at this time. of the period of public comment on the proposed decree.

A consent decree was signed by all parties on October 31, 2017 and is subject to a 30-day comment period in which it will be publicly published in the Federal Register. The consent decree provides that we will implement changes to our design, operation, and maintenance of most of our field-wide storage tank systems to enhance our emission management in the DJ Basin.  Agreed upon and planned efforts include, but are not limited to, vapor control system modifications and verification, increased inspection and monitoring, and installation of tank pressure monitors. We voluntarily included in the consent decree approximately 40 additional facilities associated with our pending acquisition of additional assets in the basin.  The three primary elements of the consent decree are: (i) fine/supplemental environmental projects ($1.5 million cash fine, plus $1 million in supplemental environmental projects); (ii) injunctive relief with an estimated cost of approximately $18 million, primarily representing capital enhancements to our operations; and (iii) mitigation with an estimated cost of $1.7 million.  Certain expenditures for the injunctive relief are believed to have been incurred in 2016 and 2017, with the remainder expected to be incurred over the next few years. We do not believe that the expenditures resulting from the settlement will have a material adverse effect on our consolidated financial statements. Although we believe the consent decree will be approved by the court following the comment period, this cannot be guaranteed. 

NOTE 1317 - 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-disclosedpreviously disclosed lock-up agreements, the resale of these shares were restricted for sale.was restricted. The lock-up period ended on June 4, 2017. We have registered the 9.4 million shares of our common stock for resale.resale under the Securities Act of 1933.

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
         

Table of contents
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(unaudited)

  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 2017 2016
  (in thousands)
         
Stock-based compensation expense $4,761
 $4,079
 $14,587
 $15,205
Income tax benefit (1,781) (1,552) (5,457) (5,786)
Net stock-based compensation expense $2,980
 $2,527
 $9,130
 $9,419
         

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.

Table of contents
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(unaudited)


The Compensation Committee of our Board of Directors awarded SARs to our executive officers during the sixnine months ended JuneSeptember 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,Nine Months Ended September 30,
2017 20162017 2016
      
Expected term of award (in years)6
 6
6
 6
Risk-free interest rate2.0% 1.8%2.0% 1.8%
Expected volatility53.3% 54.5%53.3% 54.5%
Weighted-average grant date fair value per share$38.58
 $26.96
$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 sixnine months ended JuneSeptember 30, 2017:

Number of
SARs
 Weighted-Average
Exercise
Price
 Average Remaining Contractual
Term (in years)
 
Aggregate Intrinsic
Value
(in thousands)
Number of
SARs
 Weighted-Average
Exercise
Price
 Average Remaining Contractual
Term (in years)
 
Aggregate Intrinsic
Value
(in thousands)
Outstanding at December 31, 2016244,078
 $41.36
 6.9
 $7,620
244,078
 $41.36
 6.9
 $7,620
Awarded54,142
 74.57
 
 
54,142
 74.57
 
 
Outstanding at June 30, 2017298,220
 47.39
 7.0
 1,158
Exercisable at June 30, 2017186,248
 39.38
 5.8
 1,093
Outstanding at September 30, 2017298,220
 47.39
 6.7
 2,043
Exercisable at September 30, 2017186,248
 39.38
 5.6
 1,867

Total compensation cost related to non-vested SARs granted and not yet recognized in our condensed consolidated statement of operations as of JuneSeptember 30, 2017 was $2.8$2.3 million. The cost is expected to be recognized over a weighted-average period of 2.11.9 years.
    
Restricted Stock Awards

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

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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 sixnine months ended JuneSeptember 30, 2017:
Shares Weighted-Average
Grant Date
Fair Value
Shares Weighted-Average
Grant Date
Fair Value per Share
      
Non-vested at December 31, 2016479,642
 $56.09
479,642
 $56.09
Granted248,946
 67.02
260,019
 66.00
Vested(202,427) 56.43
(206,242) 56.44
Forfeited(5,311) 67.20
(7,990) 64.32
Non-vested at June 30, 2017520,850
 61.06
Non-vested at September 30, 2017525,429
 60.73
      

Table of contents
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(unaudited)


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

As of/Six Months Ended June 30,

As of/Nine Months Ended September 30,

2017 20162017 2016
(in thousands, except per share data)(in thousands, except per share data)
      
Total intrinsic value of time-based awards vested$13,103
 $13,314
$13,266
 $14,675
Total intrinsic value of time-based awards non-vested22,454
 31,506
25,762
 35,079
Market price per common share as of June 30,43.11
 57.61
Market price per common share as of September 30,49.03
 67.06
Weighted-average grant date fair value per share67.02
 57.11
66.00
 57.12

Total compensation cost related to non-vested time-based awards and not yet recognized in our condensed consolidated statements of operations as of JuneSeptember 30, 2017 was $25.7$22.0 million. This cost is expected to be recognized over a weighted-average period of 2.11.9 years.

Market-Based Awards. The fair value of the market-based restricted shares is amortized ratably over the requisite service period, primarily three years. The market-based shares vest if the participant is continuously employed throughout the performance period and the market-based performance measure is achieved, with a maximum vesting period of three years. All compensation cost related to the market-based awards will be recognized if the requisite service period is fulfilled, even if the market condition is not achieved.
    
The Compensation Committee of our Board of Directors awarded a total of 28,069 market-based restricted shares to our executive officers during the sixnine months ended JuneSeptember 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,Nine Months Ended September 30,
2017 20162017 2016
      
Expected term of award (in years)3
 3
3
 3
Risk-free interest rate1.4% 1.2%1.4% 1.2%
Expected volatility51.4% 52.3%51.4% 52.3%
Weighted-average grant date fair value per share$94.02
 $72.54
$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.
    
The following table presents the change in non-vested market-based awards during the nine months ended September 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 September 30, 2017
 76,489
 75.63
     


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PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JuneSeptember 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,As of /Nine Months Ended September 30,
2017 20162017 2016
(in thousands, except per share data)(in thousands, except per share data)
      
Total intrinsic value of market-based awards vested$
 $1,174
$
 $1,174
Total intrinsic value of market-based awards non-vested3,297
 4,871
3,750
 5,670
Market price per common share as of June 30,43.11
 57.61
Market price per common share as of September 30,49.03
 67.06
Weighted-average grant date fair value per share94.02
 72.54
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 JuneSeptember 30, 2017 was $3.4$2.9 million. This cost is expected to be recognized over a weighted-average period of 2.11.9 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 sixnine months ended JuneSeptember 30, 2017, we acquired 79,38180,572 shares pursuant to our stock-based compensation plans for payment of tax liabilities, of which 46,82249,446 shares were reissued and 42,95641,523 shares are available for reissuance pursuant to ourthe 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 JuneSeptember 30, 2017, no preferred shares have been issued.

PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(unaudited)


NOTE 1418 - 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.

PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(unaudited)


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 - basic65,859
 46,742
 65,804
 44,175
Dilutive effect of:       
Restricted stock94
 
 176
 
Other equity-based awards66
 
 86
 
Weighted-average common shares and equivalents outstanding - diluted66,019
 46,742
 66,066
 44,175
        
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
 (in thousands)
        
Weighted-average common shares outstanding - basic65,865
 48,839
 65,825
 45,741
Weighted-average common shares and equivalents outstanding - diluted65,865
 48,839
 65,825
 45,741

We reported a net loss for the three and sixnine months ended JuneSeptember 30, 2017 and 2016. As a result, our basic and diluted weighted-average common shares outstanding were the same for thateach 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,Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 20162017 2016 2017 2016
(in thousands)(in thousands)
              
Weighted-average common share equivalents excluded from diluted earnings per share due to their anti-dilutive effect:              
Restricted stock376
 768
 119
 745
588
 660
 585
 705
Convertible notes
 358
 
 478

 
 
 345
Other equity-based awards1
 103
 10
 105
48
 97
 82
 103
Total anti-dilutive common share equivalents377
 1,229
 129
 1,328
636
 757
 667
 1,153
              

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 sixnine months ended JuneSeptember 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.

PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(unaudited)


NOTE 1519 - 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; and
(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
PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2017
(unaudited)


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 Condensed Consolidating Balance Sheets
 June 30, 2017 September 30, 2017
 Parent Guarantor Eliminations Consolidated Parent Guarantor Eliminations Consolidated
 (in thousands) (in thousands)
Assets                
Current assets $381,313
 $14,905
 $
 $396,218
 $299,239
 $35,463
 $
 $334,702
Properties and equipment, net 1,945,252
 2,220,320
 
 4,165,572
 1,911,759
 1,970,941
 
 3,882,700
Intercompany receivable 120,106
 
 (120,106) 
 199,871
 
 (199,871) 
Investment in subsidiaries 1,733,615
 
 (1,733,615) 
 1,467,623
 
 (1,467,623) 
Goodwill 
 56,331
 
 56,331
Noncurrent assets 37,966
 841
 
 38,807
 89,245
 640
 
 89,885
Total Assets $4,218,252
 $2,292,397
 $(1,853,721) $4,656,928
 $3,967,737
 $2,007,044
 $(1,667,494) $4,307,287
                
Liabilities and Stockholders' Equity                
Current liabilities $277,443
 $53,223
 $
 $330,666
 $310,997
 $62,791
 $
 $373,788
Intercompany payable 
 120,106
 (120,106) 
 
 199,871
 (199,871) 
Long-term debt 1,049,004
 
 
 1,049,004
 1,051,571
 
 
 1,051,571
Other noncurrent liabilities 177,363
 373,872
 11,581
 562,816
 178,567
 276,759
 
 455,326
Stockholders' equity 2,714,442
 1,745,196
 (1,745,196) 2,714,442
 2,426,602
 1,467,623
 (1,467,623) 2,426,602
Total Liabilities and Stockholders' Equity $4,218,252
 $2,292,397
 $(1,853,721) $4,656,928
 $3,967,737
 $2,007,044
 $(1,667,494) $4,307,287

  Condensed Consolidating Balance Sheets
  December 31, 2016
  Parent Guarantor Eliminations Consolidated
  (in thousands)
Assets        
Current assets $387,309
 $12,516
 $
 $399,825
Properties and equipment, net 1,884,147
 2,118,847
 
 4,002,994
Intercompany receivable 9,415
 
 (9,415) 
Investment in subsidiaries 1,765,092
 
 (1,765,092) 
Goodwill 
 62,041
 
 62,041
Noncurrent assets 20,811
 171
 
 20,982
Total Assets $4,066,774
 $2,193,575
 $(1,774,507) $4,485,842
         
Liabilities and Stockholders' Equity        
Current liabilities $235,121
 $35,457
 $
 $270,578
Intercompany payable 
 9,415
 (9,415) 
Long-term debt 1,043,954
 
 
 1,043,954
Other noncurrent liabilities 164,945
 383,611
 
 548,556
Stockholders' equity 2,622,754
 1,765,092
 (1,765,092) 2,622,754
Total Liabilities and Stockholders' Equity $4,066,774
 $2,193,575
 $(1,774,507) $4,485,842

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PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JuneSeptember 30, 2017
(unaudited)


  Condensed Consolidating Balance Sheets
  December 31, 2016
  Parent Guarantor Eliminations Consolidated
  (in thousands)
Assets        
Current assets $387,309
 $12,516
 $
 $399,825
Properties and equipment, net 1,889,419
 2,118,847
 
 4,008,266
Intercompany receivable 9,415
 
 (9,415) 
Investment in subsidiaries 1,765,092
 
 (1,765,092) 
Goodwill 
 62,041
 
 62,041
Noncurrent assets 15,539
 171
 
 15,710
Total Assets $4,066,774
 $2,193,575
 $(1,774,507) $4,485,842
         
Liabilities and Stockholders' Equity        
Current liabilities $235,121
 $35,457
 $
 $270,578
Intercompany payable 
 9,415
 (9,415) 
Long-term debt 1,043,954
 
 
 1,043,954
Other noncurrent liabilities 164,945
 383,611
 
 548,556
Stockholders' equity 2,622,754
 1,765,092
 (1,765,092) 2,622,754
Total Liabilities and Stockholders' Equity $4,066,774
 $2,193,575
 $(1,774,507) $4,485,842
  Condensed Consolidating Statements of Operations
  Three Months Ended September 30, 2017
  Parent Guarantor Eliminations Consolidated
  (in thousands)
         
Operating and other revenues $150,015
 $33,220
 $
 $183,235
Production and other operating expenses 41,891
 13,129
 
 55,020
General and administrative 26,207
 3,092
 
 29,299
Exploration, geologic, and geophysical expense 217
 41,691
 
 41,908
Depreciation depletion and amortization 106,623
 18,615
 
 125,238
Impairment of properties and equipment 1,148
 251,592
 
 252,740
Impairment of goodwill 
 75,121
 
 75,121
Interest (expense) income (19,168) 372
 
 (18,796)
   Loss before income taxes (45,239) (369,648) 
 (414,887)
Income tax benefit 30,274
 92,076
 
 122,350
Equity in loss of subsidiary (277,572) 
 277,572
 
   Net loss $(292,537) $(277,572) $277,572
 $(292,537)

 Condensed Consolidating Statements of Operations Condensed Consolidating Statements of Operations
 Three Months Ended June 30, 2017 Nine Months Ended September 30, 2017
 Parent Guarantor Eliminations Consolidated Parent Guarantor Eliminations Consolidated
 (in thousands) (in thousands)
                
Operating and other revenues $252,346
 $22,812
 $
 $275,158
 $657,102
 $74,998
 $
 $732,100
Operating expenses 39,915
 7,700
 
 47,615
Production and other operating expenses 118,779
 26,049
 
 144,828
General and administrative 26,617
 2,914
 
 29,531
 76,353
 8,792
 
 85,145
Exploration, geologic, and geophysical expense 744
 43,151
 
 43,895
Depreciation depletion and amortization 108,727
 17,286
 
 126,013
 317,088
 43,479
 
 360,567
Impairment of properties and equipment 531
 27,035
 
 27,566
 2,282
 280,217
 
 282,499
Impairment of goodwill 
 75,121
 
 75,121
Provision for uncollectible notes receivable (40,203) 
 
 (40,203) (40,203) 
 
 (40,203)
Interest (expense) income (19,032) 183
 
 (18,849) (57,557) 685
 
 (56,872)
Income (loss) before income taxes 97,727
 (31,940) 
 65,787
 124,502
 (401,126) 
 (276,624)
Income tax expense (36,285) 11,748
 
 (24,537)
Income tax expense (benefit) (32,174) 103,657
 
 71,483
Equity in loss of subsidiary (20,192) 
 20,192
 
 (297,469) 
 297,469
 
Net income (loss) $41,250
 $(20,192) $20,192
 $41,250
Net loss $(205,141) $(297,469) $297,469
 $(205,141)

  Condensed Consolidating Statements of Operations
  Six Months Ended June 30, 2017
  Parent Guarantor Eliminations Consolidated
  (in thousands)
         
Operating and other revenues $507,087
 $41,778
 $
 $548,865
Operating expenses 77,415
 14,380
 
 91,795
General and administrative 50,146
 5,700
 
 55,846
Depreciation depletion and amortization 210,465
 24,864
 
 235,329
Impairment of properties and equipment 1,134
 28,625
 
 29,759
Provision for uncollectible notes receivable (40,203) 
 
 (40,203)
Interest (expense) income (38,389) 313
 
 (38,076)
   Income (loss) before income taxes 169,741
 (31,478) 
 138,263
Income tax expense (62,448) 11,581
 
 (50,867)
Equity in loss of subsidiary (19,897) 
 19,897
 
   Net income (loss) $87,396
 $(19,897) $19,897
 $87,396
Net losses of the Guarantor for the three and nine months ended September 30, 2017 are primarily the result of the exploratory dry hole expense, impairment of certain unproved Delaware Basin leasehold positions during the relevant periods, and the impairment of goodwill during the three months ended September 30, 2017.
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PDC ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JuneSeptember 30, 2017
(unaudited)



Net losses of the Guarantor for the three and six months ended June 30, 2017 are primarily the result of the impairment of certain unproved Delaware Basin leasehold positions during the respective periods.
 Condensed Consolidating Statements of Cash Flows Condensed Consolidating Statements of Cash Flows
 Six Months Ended June 30, 2017 Nine Months Ended September 30, 2017
 Parent Guarantor Eliminations Consolidated Parent Guarantor Eliminations Consolidated
 (in thousands) (in thousands)
                
Cash flows from operating activities $246,128
 $17,069
 $
 $263,197
 $382,715
 $28,687
 $
 $411,402
Cash flows from investing activities:                
Capital expenditures for development of crude oil and natural properties (198,954) (135,452) 
 (334,406) (315,718) (213,132) 
 (528,850)
Capital expenditures for other properties and equipment (1,792) (507) 
 (2,299) (2,488) (1,252) 
 (3,740)
Acquisition of crude oil and natural gas properties, including settlement adjustments 
 5,372
 
 5,372
Acquisition of crude oil and natural gas properties, including settlement adjustments and deposit for pending acquisition (19,761) 5,279
 
 (14,482)
Proceeds from sale of properties and equipment 1,293
 
 
 1,293
 3,322
 
 
 3,322
Sale of promissory note 40,203
 
 
 40,203
 40,203
 
 
 40,203
Restricted cash (9,250) 
 
 (9,250) (9,250) 
 
 (9,250)
Sales of short-term investments 49,890
 
 
 49,890
Purchases of short-term investments (49,890) 
 
 (49,890) (49,890) 
 
 (49,890)
Sales of short-term investments 49,890
 
 
 49,890
Intercompany transfers (109,923) 
 109,923
 
 (189,239) 
 189,239
 
Net cash from investing activities (278,423) (130,587) 109,923
 (299,087) (492,931) (209,105) 189,239
 (512,797)
Cash flows from financing activities:                
Proceeds from issuance of equity, net of issuance costs 
 
 
 
Purchase of treasury stock (5,274) 
 
 (5,274) (5,325) 
 
 (5,325)
Other (627) (18) 
 (645) (906) (45) 
 (951)
Intercompany transfers 
 109,923
 (109,923) 
 
 189,239
 (189,239) 
Net cash from financing activities (5,901) 109,905
 (109,923) (5,919) (6,231) 189,194
 (189,239) (6,276)
Net change in cash and cash equivalents (38,196) (3,613) 
 (41,809) (116,447) 8,776
 
 (107,671)
Cash and cash equivalents, beginning of period 240,487
 3,613
 
 244,100
 240,487
 3,613
 
 244,100
Cash and cash equivalents, end of period $202,291
 $
 $
 $202,291
 $124,040
 $12,389
 $
 $136,429

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PDC ENERGY, INC.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis, as well as other sections in this report, should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this report. Further, we encourage you to review the Special Note Regarding Forward-Looking Statements.

EXECUTIVE SUMMARY

Production and Financial Overview

Production volumes increased to 8.08.5 MMboe and 14.723.2 MMboe for the three and sixnine months ended JuneSeptember 30, 2017, respectively, representing increases of 5442 percentand 5047 percent as compared to the three and sixnine months ended JuneSeptember 30, 2016, respectively. The increases in production volumes were primarily attributable to the continued success of our horizontal Niobrara and Codell drilling program in the Wattenberg Field and our first full six months ofgrowing production from our recently-acquired Delaware Basin properties. Crude oil production increased 62 percent and 47 percent for the three and sixnine months ended JuneSeptember 30, 2017 compared to the three and nine months ended September 30, 2016, respectively. Crude oil production comprised approximately 40 percent of total production in each of the three and nine months ended September 30, 2017. NGL production increased 33 percent and 54 percent for the three and nine months ended September 30, 2017, respectively, compared to the three and sixnine months ended JuneSeptember 30, 2016. Crude oilNatural gas production comprised approximately 40increased 42 percent and 3943 percentof total production in the three and sixnine months ended June 30, 2017, respectively. NGL production increased 66 percent and 70 percent for the three and six months ended JuneSeptember 30, 2017, respectively, compared to the three and sixnine months ended June 30, 2016. Natural gas production increased 40 percent and 43 percent in the three and six months ended June 30, 2017, respectively, compared to the three and six months ended JuneSeptember 30, 2016. On a combined basis, total liquids production comprised 63 percent and 59 percent of our total production during each of the three months ended JuneSeptember 30, 2017 and JuneSeptember 30, 2016, respectively, and 62 percent and 6061 percent of total production during the sixnine months ended JuneSeptember 30, 2017 and JuneSeptember 30, 2016, respectively. For the three months ended JuneSeptember 30, 2017, we maintained an average daily production rate of approximately 88,10092,500 Boe per day, including 12,800 Boe per day from the Delaware Basin, up from approximately 57,10065,300 Boe per day for the three months ended JuneSeptember 30, 2016.

On a sequential quarterly basis, total production volumes for the three months ended JuneSeptember 30, 2017 as compared to the three months ended March 31,June 30, 2017 increased by 21 percent, whilewith contributions from both the Wattenberg Field and Delaware Basin. For the three months ended September 30, 2017 as compared to the three months ended June 30, 2017, total production and crude oil production each increased by 30 percent duringsix percent. Continued high line pressures in the same period. The increase in production was primarily related to 84 wells in our Wattenberg Field being turned-in-line duringhave temporarily tempered the first six months of 2017 and a 47 percent increase in our average daily productiongrowth rate in the Delaware Basin from the first quarter, to approximately 10,000 Boe per day in the quarter ended June 30, 2017. We expect thatWattenberg Field; however, we will seeare expecting an overall modest sequential production growthquarterly increase in the third quarter of 2017 and leveling off of production in the fourth quarter of 2017, based on the adjusted timing for our turn-in-lines, and expected capacity considerations associated with gathering system line pressures in the Wattenberg Field.2017.

Crude oil, natural gas, and NGLs sales increased to $213.6$232.7 million and $403.3$636.0 millionin the three and sixnine months ended JuneSeptember 30, 2017, respectively, compared to $110.8$141.8 million and $186.2$328.0 million in the three and sixnine months ended JuneSeptember 30, 2016, respectively. These 9364 percent and 11794 percent increases in sales revenues were driven by the 5442 percentand 5047 percent increases in production and 2516 percent and 4432 percent increases in average realized commodity prices.

We had positive net settlements from our commodity derivative contracts of $12.0$9.6 million for the three months ended JuneSeptember 30, 2017 as compared to positive net settlements of $53.3$47.7 million for the three months ended JuneSeptember 30, 2016. We had positive net settlements of $12.6$22.2 million for the sixnine months ended JuneSeptember 30, 2017, as compared to positive net settlements of $120.1$167.9 million for the sixnine months ended JuneSeptember 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 derivatives settled by the end of 2016.  Net settlements for the three and sixnine months ended JuneSeptember 30, 2017 reflect derivative instruments entered into since 2015, which more closely approximate recent realized prices.  Based upon the forward strip pricing at JuneSeptember 30, 2017, we expect that settlements will continue to be substantially lower in 2017 than in 2016. See Results of Operations - Commodity Price Risk Management, Net for further details of our settlements of derivatives and changes in the fair value of unsettled derivatives.

The combined revenue from crude oil, natural gas, and NGLs sales and net settlements received on our commodity derivative instruments increased 3728 percent to $225.6$242.3 million in the three months ended JuneSeptember 30, 2017 from $164.1$189.5 million in the three months ended JuneSeptember 30, 2016, and increased 3633 percent to $415.9$658.2 million in the sixnine months ended JuneSeptember 30, 2017 from $306.3$495.9 million in the sixnine months ended JuneSeptember 30, 2016.
                



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PDC ENERGY, INC.

During the three months ended JuneSeptember 30, 2017, we recorded exploratory dry hole well expense of $41.2 million, an unproved property impairment charge of $251.6 million, and we impaired certain unproved Delaware Basin leasehold positions totaling $27.0 million that expired duringall of the three months ending June 30, 2017, or are projected to expire between June 30, 2017 and December 31, 2017.  Subsequent to closinggoodwill associated with the acquisitionsassets acquired in the Delaware Basin, it was determined that developmentwhich resulted in an impairment charge of certain acreage tracts would not meet our internal expectations for acceptable rates$75.1 million. For more information regarding these expenses and charges see Results of return due to a combinationOperations - Exploration, Geologic, and Geophysical Expense, Results 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. AsOperations - Impairments of June 30, 2017, our current leasehold position in the Delaware Basin is approximately 60,000 net acres.Properties, and Results of Operations - Impairment of Goodwill.

In the three and sixnine months ended JuneSeptember 30, 2017, we generated a net incomeloss of $41.2$292.5 million and $87.4$205.1 million, respectively, or$0.62 $4.44 and $1.32$3.12 per diluted share, respectively. Our net income was negatively impacted by the aforementioned impairment charges and expensing of exploratory dry hole well costs. During the same periods, our adjusted EBITDAX, a non-U.S. GAAP financial measure, was $200.4$166.9 million and $330.6$497.6 million, respectively. Our net income and adjusted EBITDAX were positively impacted by the sale of the $40.2 million Promissory Note and the collection of the related cash proceeds in April 2017, as further described below in Results of Operations - Provision for Uncollectible Notes Receivable. Beginning in 2017, we have included non-cash stock-based compensation and exploration, geologic and geophysical expense in our reconciliation of adjusted EBITDAX.  In prior periods, we includedreported adjusted EBITDA, a non-U.S. GAAP financial measure whichthat did not include these adjustments.  All prior periods have been conformed for comparability of this updated presentation. In the three and sixnine months ended JuneSeptember 30, 2016, our net loss per diluted share was $2.04$0.48 and $3.78,$4.16, respectively, and our adjusted EBITDAX a non-GAAP financial measure, was $122.4$133.0 million and $180.2$313.3 million, respectively. Our cash flow from operations was $263.2$411.4 million and our adjusted cash flow from operations, a non-U.S. GAAP financial measure, was $256.6$407.5 million in the sixnine months ended JuneSeptember 30, 2017. See Reconciliation of Non-U.S. GAAP Financial Measures, below, for a more detailed discussion of these non-U.S. GAAP financial measures and a reconciliation of these measures to the most comparable U.S. GAAP measures.

Liquidity

Available liquidity as of JuneSeptember 30, 2017 was $902.3$836.4 million, which iswas comprised of $202.3$136.4 million of cash and cash equivalents and $700.0$700 million available for borrowing under our revolving credit facility at our current commitment level. We expect decreases in our cash balance overduring the courseremainder of 2017 as we continuedue to: (i) the expected closing of the pending Wattenberg Field acquisition described below, (ii) continued planned development in the core Wattenberg Field, and (iii) further capital investment in our Delaware Basin assets. In October 2017, we entered into a Sixth Amendment to the Third Amended and Restated Credit Agreement. The amendment allowed the borrowing base to be set above the $1.0 billion allowable borrowing capacity of the facility. The borrowing base redetermination for the fall of 2017 was confirmed at $1.1 billion and we elected to maintain a $700 million commitment level as of the date of this report.

We intend to continue to manage our liquidity position by a variety of means, including through the generation of cash flows from operations, investment in projects with attractive rates of return, protection of cash flows on a portion of our anticipated sales through the use of an active commodity derivative hedging program, potential utilization of our borrowing capacity under our revolving credit facility, and whenif warranted, capital markets transactions from time to time.


Pending Acquisition and Acreage Exchanges

Pending Acquisition. In September 2017, we entered into a purchase and sale agreement to acquire certain assets from Bayswater and certain related parties, pursuant to which, subject to the terms and conditions of the agreement, we have agreed to acquire approximately 8,300 net acres, 30 DUCs, and an incremental 240 gross drilling locations, for approximately $210 million in cash, subject to certain pre- and post-closing adjustments. We plan to turn-in-line 18 of these DUCs at approximately year-end 2017, with the completion costs expected to be treated as an increase to the purchase price. Upon executing the purchase and sale agreement, we paid a $21 million deposit toward the purchase price into an escrow account, which is included in other assets in our September 30, 2017 condensed consolidated balance sheet. Assuming all conditions required for closing are met, the acquisition is expected to close in December 2017 and will be funded by a combination of available cash and debt.

Pending Acreage Exchanges. In September 2017, we entered into an acreage exchange transaction to consolidate certain acreage positions in the core area of the Wattenberg Field. Pursuant to the transaction, we will exchange leasehold acreage with some limited in-process development wells. Upon closing, we expect to receive approximately 11,700 net acres in exchange for approximately 12,100 net acres, with minimal cash exchanged between the parties. The difference in net acres is primarily due to variances in working and net revenue interests. The acreage exchange is anticipated to close in the fourth quarter of 2017; however, there can be no assurance that conditions to closing will be satisfied.

In June 2017, we entered into an acreage exchange transaction that also involves the consolidation of certain acreage positions in the core area of the Wattenberg Field. Pursuant to the transaction, we will exchange leasehold acreage with some limited in-process development wells. Upon closing, we estimate that we will receive approximately 3,900 net acres in
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PDC ENERGY, INC.

exchange for approximately 4,100 net acres with minimal cash exchanged between the parties. The difference in net acres is primarily due to variances in working and net revenue interests. This acreage exchange is also expected to close in the fourth quarter of 2017; however, there can be no assurance that conditions to closing will be satisfied.

Operational Overview

During the sixnine months ended JuneSeptember 30, 2017, we continued to execute our strategic plan to grow production while preserving our financial strength and liquidity. During the second quarter of 2017, we operated four drilling rigs in the Wattenberg Field and four drilling rigs in the Delaware Basin. Our drilling efficiency in the Wattenberg Field over the last two quartersnine months has resulted in shorter drill cycle times; therefore, we expect to decreasedecreased our rig count to three rigs beginning in the fourth quarter of 2017. Because of the shorter drill times, the impact of the reduced rig count on our expected turn-in-line count in the Wattenberg Field is expected to be minimal in 2017. In the Delaware Basin, one rig contract expired in Augustduring the three months ended September 30, 2017, and we expectadjusted to utilizeoperating three drilling rigs throughrigs. During the endthird quarter of 2017. Our active drilling program2017, we turned in line to sales 39 wells in Wattenberg and four wells in the Delaware Basin in the first half of 2017 provided us with a degree of flexibility with respect to holding acreage in the area on a near-term basis and allows us to shift immediate focus to improving drill cycle times and the per well costs of our Delaware Basin wells.Basin.

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PDC ENERGY, INC.




The following tables summarizes our drilling and completion activity for the sixnine months ended JuneSeptember 30, 2017:

 Wells Operated by PDC Wells Operated by PDC
 Wattenberg Field Delaware Basin Total Wattenberg Field Delaware Basin Total
  Gross  Net Gross Net Gross Net  Gross  Net Gross Net Gross Net
In-process as of December 31, 2016 64
 52.7
 5
 4.8
 69
 57.5
 64
 52.7
 5
 4.8
 69
 57.5
Wells spud 73
 65.7
 12
 11.0
 85
 76.7
 119
 105.6
 18
 16.6
 137
 122.2
Wells turned-in-line to sales (72) (59.2) (9) (8.7) (81) (67.9) (111) (93.6) (11) (10.2) (122) (103.8)
In-process as of June 30, 2017 65
 59.2
 8
 7.1
 73
 66.3
Exploratory dry holes 
 
 (2) (2.0) (2) (2.0)
In-process as of September 30, 2017 72
 64.7
 10
 9.2
 82
 73.9

 Wells Operated by Others Wells Operated by Others
 Wattenberg Field Delaware Basin Total Wattenberg Field Delaware Basin Total
  Gross  Net Gross Net Gross Net  Gross  Net Gross Net Gross Net
In-process as of December 31, 2016 18
 3.4
 
 
 18
 3.4
 18
 3.4
 
 
 18
 3.4
Wells spud 71
 9.0
 3
 0.8
 74
 9.8
 89
 12.2
 7
 1.0
 96
 13.2
Wells turned-in-line to sales (12) (1.9) 
 
 (12) (1.9) (40) (4.5) (2) (0.4) (42) (4.9)
In-process as of June 30, 2017 77
 10.5
 3
 0.8
 80
 11.3
In-process as of September 30, 2017 67
 11.1
 5
 0.6
 72
 11.7

Our in-process wells represent wells that are in the process of being drilled and/or have been drilled and are waiting to be fractured and/or for gas pipeline connection. Our drilled but uncompleted wells ("DUCs")DUCs are generally completed and turned in-line to sales within three to nine months of drilling. The majority of the PDC-operated in-process wells at each period end are DUCs, as we do not begin the completion process until the entire well pad is drilled. As we continue to monitor our capital investment and due to the efficiencies gained by our operating team in the Wattenberg Field, we expect that we will have an increase of approximately 25 wells in our in-process well count at December 31, 2017 as comparedrelative to December 31, 2016, resulting from faster than expected drill cycle times.September 30, 2017. All appropriate costs incurred through the end of the period have been capitalized, while the capital investment to complete the wells will be incurred in the period in which the wells are completed. We expect that the level of non-operated well activity reflected in the table above will decrease upon the anticipated closing of our aforementioned pending acreage exchanges.

2017 Operational Outlook

Based on our revised timing of well completions and the estimated productivity of wells associated with our capital investment program, we currently believe that our 2017 production will be approximately 32 MMBoe. We expect that approximately 40 percent of our 2017 production will be crude oil and approximately 23 percent will be NGLs, for total liquids of approximately 63 percent. The anticipated percentage of production from NGLs has increased due to the success of field recovery efforts and improved yields by our third-party processors in the Wattenberg Field.

We expect our capital expenditures to be approximately $800 million in 2017, an estimate that we havewhich takes into account the current increased to account for higher per well costs in the Delaware Basin and increasesthe anticipated increase in the total expected number of wells to be spud in the Wattenberg Field during the year. We alsoyear compared to our original 2017 budget. As previously disclosed, we added a third and fourth rig in the first quarter of 2017 in the Delaware Basin, which was sooner than initially contemplated in our budget, in order to protect certain leasehold positions and to create greater future operational flexibility. This flexibility as it relates to holding acreage in the Delaware Basin is particularly important given the volatilityFinally, some additional
Table of commodity prices and potential further service cost increases in the Delaware Basin as it should allow us to adjust our drilling program to two rigs in this area if necessary for a period of time without risk of losing significant additional acreage.contents
PDC ENERGY, INC.

Further, some additional capital investment has been included in our forecast for anthe closed and anticipated Wattenberg Field acreage tradetrades that would, if completed, increase our working interest in certain wells. The trade is expected to close in the second half of 2017.

Wattenberg Field. The 2017 capital investment forecast has been reduced tois estimated at approximately $450 million in the Wattenberg Field withField. Our plan contemplates running three rigs runningin the field in the fourth quarter of 2017. Approximately $445 million of our 2017 capital investment program is expected to be allocated to development activities, comprised of approximately $425 million for our operated drilling program and approximately $20 million for wells drilled and operated by others. The remainder of the
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PDC ENERGY, INC.

Wattenberg Field capital investment program is expected to be used for miscellaneous well equipment and capital projects. Wells in the Wattenberg Field typically have productive horizons at a depth of approximately 6,500 to 7,500 feet below the surface. In 2017, ourOur revised investment forecast anticipates spudding approximately 155 and turning-in-line approximately 133 horizontal operated wells with lateral lengths of 4,000 to 10,000 feet. We do not expect to increase our 2017 capital investment forecast in connection with the acquisition agreement we entered into with Bayswater and certain related parties, as the acquisition is expected to close late in December. There are expected to be costs in addition to the $210 million purchase price as a result of continued capital activity on the DUCs being acquired in the transaction, which will be accounted for as additional purchase price.

Delaware Basin. Our 2017 investment forecast contemplates the operation ofWe are currently operating a three-rig drilling program for the remainder of 2017 in the Delaware Basin. Total capital investment in the Delaware Basin has been increasedfor the year is estimated to be approximately $345 million, of which approximately $285 million is allocatedexpected to be used to spud 24 and turn-in-line an estimated 20 wells. Expected per well drilling costs in the Delaware Basin have increased by approximately 1510 to 2015 percent during the secondthird quarter of 2017 as compared to the firstsecond quarter of 2017, primarily due to higher costs of services and supplies and longer than anticipated drill cycle times.  To enhance our understanding of the geology in the Delaware Basin, we initiated various engineering studies on mosta large portion of our Delaware Basin wells, including expanded depth pilot holes and logging/seismic services. These studies are providing important information to our operating team; however, they have come with additional unexpected costs. Additionally, mechanical issues have resulted in cost overruns for certain wells.wells we have drilled in the area. Of the 20 planned turn-in-lines during 2017, 9nine are expected to have extended laterals of approximately 10,000 horizontal feet with an estimated 70 to 75 completion stages per well. Similarly spaced completion stages are anticipated for the remaining 11 turn-in-lines. Wells in the Delaware Basin typically have productive horizons at a depth of approximately 9,000 to 11,000 feet below the surface. We plan to invest approximately $15 million for leasing, seismic, and technical studies with an additional $35 million for midstream-related projects including gas connections and surface location infrastructure. The remaining $10 million of the Delaware Basin capital investment program is expected to be used for non-operated capital projects.

We expect to incur costs associated with the purchase of seismic data and pilot hole exploratory work in the Delaware Basin, which will be accounted for as exploration, geologic, and geophysical expense. We estimate that this will result in approximately $5 million to $10 million of exploration expense in 2017.

Utica Shale. As a result of our evaluation of our strategic alternatives with respect to our Utica Shale position, we are working toward a divestiture of these properties during 2017. As of June 30, 2017, these assets did not meet the accounting criteria to be classified as held-for-sale; therefore, they continue to be included in properties and equipment on our condensed consolidated balance sheets. Subsequent to June 30, 2017, we engaged an investment banking group to assist in marketing the Utica properties for sale; therefore, these operations are expected to be classified as held-for-sale upon meeting the criteria for such classification in the third quarter of 2017.

 
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PDC ENERGY, INC.

Results of Operations

Summary Operating Results

The following table presents selected information regarding our operating results:
Three Months Ended June 30, Six Months Ended June 30,Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 Percentage Change 2017 2016 Percentage Change2017 2016 Percentage Change 2017 2016 Percentage Change
(dollars in millions, except per unit data)(dollars in millions, except per unit data)
Production                      
Crude oil (MBbls)3,237
 1,993
 62.4 % 5,745
 3,900
 47.3 %3,439
 2,340
 47.0 % 9,184
 6,241
 47.2 %
Natural gas (MMcf)17,783
 12,673
 40.3 % 33,367
 23,351
 42.9 %19,070
 13,417
 42.1 % 52,437
 36,768
 42.6 %
NGLs (MBbls)1,814
 1,092
 66.1 % 3,357
 1,975
 70.0 %1,892
 1,428
 32.5 % 5,249
 3,402
 54.3 %
Crude oil equivalent (MBoe)8,015
 5,197
 54.2 % 14,663
 9,767
 50.1 %8,509
 6,004
 41.7 % 23,172
 15,771
 46.9 %
Average Boe per day (Boe)88,078
 57,111
 54.2 % 81,011
 53,664
 50.9 %92,491
 65,263
 41.7 % 84,880
 57,558
 47.5 %
Crude Oil, Natural Gas and NGLs Sales                      
Crude oil$148.8
 $80.4
 85.1 % $271.8
 $134.4
 102.2 %$157.0
 $98.5
 59.4 % $428.8
 $233.0
 84.0 %
Natural gas38.3
 17.4
 120.1 % 75.3
 32.3
 133.1 %41.5
 27.4
 51.5 % 116.7
 59.6
 95.8 %
NGLs26.5
 13.0
 103.8 % 56.2
 19.5
 188.2 %34.2
 15.9
 115.1 % 90.5
 35.4
 155.6 %
Total crude oil, natural gas, and NGLs sales$213.6
 $110.8
 92.8 % $403.3
 $186.2
 116.6 %$232.7
 $141.8
 64.1 % $636.0
 $328.0
 93.9 %
                      
Net Settlements on Commodity Derivatives                      
Crude oil$5.1
 $38.7
 (86.8)% $1.9
 $92.0
 (97.9)%$5.4
 $39.5
 (86.3)% $7.4
 $131.6
 (94.4)%
Natural gas6.8
 14.6
 (53.4)% 10.6
 28.1
 (62.3)%6.3
 8.2
 (23.2)% 16.8
 36.3
 (53.7)%
NGLs (propane portion)0.1
 
 *
 0.1
 
 *
(2.1) 
 *
 (2.0) 
 *
Total net settlements on derivatives$12.0
 $53.3
 (77.5)% $12.6
 $120.1
 (89.5)%$9.6
 $47.7
 (79.9)% $22.2
 $167.9
 (86.8)%
                      
Average Sales Price (excluding net settlements on derivatives)Average Sales Price (excluding net settlements on derivatives)        Average Sales Price (excluding net settlements on derivatives)        
Crude oil (per Bbl)$45.97
 $40.37
 13.9 % $47.31
 $34.46
 37.3 %$45.66
 $42.11
 8.4 % $46.69
 $37.33
 25.1 %
Natural gas (per Mcf)2.16
 1.37
 57.7 % 2.26
 1.38
 63.8 %2.17
 2.04
 6.4 % 2.23
 1.62
 37.7 %
NGLs (per Bbl)14.59
 11.93
 22.3 % 16.75
 9.89
 69.4 %18.11
 11.12
 62.9 % 17.24
 10.41
 65.6 %
Crude oil equivalent (per Boe)26.65
 21.33
 24.9 % 27.50
 19.07
 44.2 %27.35
 23.62
 15.8 % 27.45
 20.80
 32.0 %
                      
Average Costs and Expenses (per Boe)                      
Lease operating expenses$2.50
 $2.63
 (4.9)% $2.72
 $2.97
 (8.4)%$2.98
 $2.33
 27.9 % $2.81
 $2.73
 2.9 %
Production taxes1.88
 1.16
 62.1 % 1.87
 1.04
 79.8 %1.82
 1.59
 14.5 % 1.85
 1.25
 48.0 %
Transportation, gathering and processing expenses0.81
 0.86
 (5.8)% 0.84
 0.87
 (3.4)%1.15
 0.84
 36.9 % 0.96
 0.86
 11.6 %
General and administrative expense3.68
 4.54
 (18.9)% 3.81
 4.75
 (19.8)%3.44
 5.41
 (36.4)% 3.67
 5.00
 (26.6)%
Depreciation, depletion and amortization15.72
 20.59
 (23.7)% 16.05
 20.93
 (23.3)%14.72
 18.81
 (21.7)% 15.56
 20.12
 (22.7)%
                      
Lease Operating Expenses by Operating Region (per Boe)Lease Operating Expenses by Operating Region (per Boe)          Lease Operating Expenses by Operating Region (per Boe)          
Wattenberg Field$2.22
 $2.66
 (16.5)% $2.42
 $3.00
 (19.3)%$2.49
 $2.39
 4.2 % $2.45
 $2.77
 (11.6)%
Delaware Basin4.88
 
 *
 5.53
 
 *
6.07
 
 *
 5.76
 
 *
Utica Shale1.34
 2.08
 (35.6)% 1.48
 2.28
 (35.1)%1.91
 1.27
 50.4 % 1.60
 1.87
 (14.4)%

*Percentage change is not meaningful.
Amounts may not recalculate due to rounding.




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Crude Oil, Natural Gas, and NGLs Sales

For the three and sixnine months ended JuneSeptember 30, 2017, crude oil, natural gas, and NGLs sales revenue increased compared to the three and sixnine months ended JuneSeptember 30, 2016 due to the following (in millions):

June 30, 2017September 30, 2017
Three Months Ended Six Months EndedThree Months Ended Nine Months Ended
(in millions)(in millions)
Increase in production$65.9
 $91.1
$63.0
 $154.5
Increase in average crude oil price18.2
 73.8
12.2
 86.0
Increase in average natural gas price13.9
 29.2
2.5
 31.7
Increase in average NGLs price4.8
 23.0
13.2
 35.8
Total increase in crude oil, natural gas and NGLs sales revenue$102.8
 $217.1
$90.9
 $308.0

Crude Oil, Natural Gas, and NGLs Production

The following tables present crude oil, natural gas, and NGLs production. Our acquisitions of assets in the Delaware Basin closed in December 2016; therefore, there is no comparative data for the three and sixnine months ended JuneSeptember 30, 2016:
 Three Months Ended June 30, Six Months Ended June 30, Three Months Ended September 30, Nine Months Ended September 30,
Production by Operating Region 2017 2016 Percentage Change 2017 2016 Percentage Change 2017 2016 Percentage Change 2017 2016 Percentage Change
Crude oil (MBbls)                        
Wattenberg Field 2,798
 1,894
 47.7 % 4,940
 3,712
 33.1 % 2,943
 2,216
 32.8 % 7,883
 5,929
 33.0 %
Delaware Basin 364
 
 *
 639
 
 *
 436
 
 *
 1,075
 
 *
Utica Shale 75
 99
 (24.4)% 166
 188
 (12.1)% 60
 124
 (51.4)% 226
 312
 (27.7)%
Total 3,237
 1,993
 62.4 % 5,745
 3,900
 47.3 % 3,439
 2,340
 47.0 % 9,184
 6,241
 47.2 %
Natural gas (MMcf)                        
Wattenberg Field 15,192
 12,098
 25.6 % 28,906
 22,268
 29.8 % 15,788
 12,700
 24.3 % 44,694
 34,968
 27.8 %
Delaware Basin 2,025
 
 *
 3,271
 
 *
 2,781
 
 *
 6,052
 
 *
Utica Shale 566
 575
 (1.6)% 1,190
 1,083
 9.9 % 501
 717
 (30.2)% 1,691
 1,800
 (6.0)%
Total 17,783
 12,673
 40.3 % 33,367
 23,351
 42.9 % 19,070
 13,417
 42.1 % 52,437
 36,768
 42.6 %
NGLs (MBbls)                        
Wattenberg Field 1,551
 1,047
 48.1 % 2,909
 1,888
 54.1 % 1,564
 1,353
 15.6 % 4,473
 3,240
 38.0 %
Delaware Basin 212
 
 *
 343
 
 *
 282
 
 *
 625
 
 *
Utica Shale 51
 45
 11.9 % 105
 87
 19.8 % 46
 75
 (38.7)% 151
 162
 (7.3)%
Total 1,814
 1,092
 66.1 % 3,357
 1,975
 70.0 % 1,892
 1,428
 32.5 % 5,249
 3,402
 54.3 %
Crude oil equivalent (MBoe)                        
Wattenberg Field 6,882
 4,957
 38.8 % 12,667
 9,311
 36.0 % 7,138
 5,686
 25.5 % 19,805
 14,997
 32.1 %
Delaware Basin 914
 
 *
 1,527
 
 *
 1,182
 
 *
 2,709
 
 *
Utica Shale 219
 240
 (8.5)% 469
 456
 2.8 % 189
 318
 (40.6)% 658
 774
 (15.0)%
Total 8,015
 5,197
 54.2 % 14,663
 9,767
 50.1 % 8,509
 6,004
 41.7 % 23,172
 15,771
 46.9 %
Average crude oil equivalent per day (Boe)                        
Wattenberg Field 75,621
 54,478
 38.8 % 69,984
 51,159
 36.8 % 77,582
 61,804
 25.5 % 72,545
 54,733
 32.5 %
Delaware Basin 10,047
 
 *
 8,437
 
 *
 12,845
 
 *
 9,923
 
 *
Utica Shale 2,410
 2,633
 (8.5)% 2,590
 2,505
 3.4 % 2,064
 3,459
 (40.3)% 2,412
 2,825
 (14.6)%
Total 88,078
 57,111
 54.2 % 81,011
 53,664
 51.0 % 92,491
 65,263
 41.7 % 84,880
 57,558
 47.5 %
* Percentage change is not meaningful.
Amounts may not recalculate due to rounding.

In the Wattenberg Field, we rely on third-party midstream service providers to construct gathering, compression, and processing facilities to keep pace with our and the overall field's natural gas production growth. From time to time,time-to-time, our production has been adversely affected by high line pressures on the gas gathering facilities, primarily due to higher ambient temperatures and increases in field-wide production volumes. In 2015, our primary midstream service provider added additional facilities which significantly reducedAs a result, we have experienced some production constraints from late 2015 to mid-2017. However, we are
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startingcurtailments from time to experience higher line pressures due primarily to continued growth in field-wide production volumes. As a result, we anticipate higher production curtailmentstime, including in the second halfthird quarter of 2017 and through most of 2018 until our primary midstream provider completes construction of an additional midstream plant and facilities.2017. We believe that our 2017 production guidance range appropriately reflects the foreseeable impact of such higher gathering system line pressurespressures. Our primary midstream service provider has added some additional capacity to its system in 2017, and cooler weather is expected to help increase the efficiency of the system in the fourth quarter of 2017. For the nine months ended September 30, 2017, 93 percent of our production in the Wattenberg Field; however, such curtailment estimations may differField was delivered from horizontal wells, with the actualremaining seven percent coming from vertical wells. The horizontal wells are less prone to issues than the vertical wells in that they are newer and have greater producing capacity and higher formation pressures, and therefore tend to be more resilient to gas system pressure issues. While this will lessen the impact of the pressures, we expect to production duecontinue to incremental uncertainties.operate in a constrained environment through the first nine months of 2018, at which time additional processing capacity is scheduled to be brought into operation by our primary midstream provider.

We continue to work closely with our third partythird-party midstream providers in an effort to ensure that adequate midstream system capacity is available going forward in the Wattenberg Field. For example, weWe along with other operators made a commitment with DCP Midstream, LP ("DCP") in December 2016 in connection withto support DCP's construction of two additional gathering, compression, and processing facilities with associated gathering pipe and compression in the field. This expansion isThese expansions are expected to increase DCP's system capacity, assist in the control of line pressures on its natural gas gathering facilities, and reduce production curtailments in the field. We will be bound to the incremental volume requirements in this agreementthese agreements on the first day of the calendar month after the actual in-service datedates of the plant,plants, which isare currently expectedscheduled to occur in late 2018.the fourth quarter of 2018 and April 2019. We are currently working with DCP to identify opportunities to accelerate the completion of the first of these facilities. The agreement imposesagreements impose a baseline volume commitment and we are required for the first three yearsa guarantee of the contract to guarantee a certain target profit margin to DCP on thesethose volumes sold.during the initial three years of the contracts. Under our current drilling plans, we expect to meet both the baseline and incremental volume commitments, and we believe that the contractual target profit margin will be achieved without an additional payment from us. See footnote titled Commitments and Contingencies for additional details regarding the agreement.agreements. We also seekcontinue to negotiate constructionwork with all of incremental projects designed to add capacity to our primary third-party midstream service provider'sproviders in the field in an effort to ensure all of the existing infrastructure is fully utilized and that all options for system between major new facility expansions.expansions are evaluated and implemented, where possible.

The ultimate timing and availability of adequate infrastructure is not within our control and if our midstream service provider’sproviders' construction projects are delayed, we could experience higher gathering line pressures that may negatively impact our ability to fulfill our growth plans. Total system infrastructure performance may also be affected by a number of other factors, including potential additional increases in production from the Wattenberg Field.

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PDC ENERGY, INC.


Crude Oil, Natural Gas, and NGLs Pricing

Our results of operations depend upon many factors. Key factors areinclude the price of crude oil, natural gas, and NGLs and our ability to market our production effectively. Crude oil, natural gas, and NGL prices have a high degree of volatility and our realizations can change substantially. Our realizedsales prices for crude oil, natural gas, and NGLs increased during the three and sixnine months ended JuneSeptember 30, 2017 compared to the three and sixnine months ended JuneSeptember 30, 2016. NYMEX crude oil prices increased 6seven percent and 2720 percent, respectively, and NYMEX natural gas prices increased 63seven percent and 6138 percent, respectively, as compared to the three and sixnine months ended JuneSeptember 30, 2016. The realized NGL prices in the Wattenberg Field are reflected in the tables below, net of the processing and transport costs that are embedded in the applicable percent-of-proceeds contracts, as are a portion of our Delaware Basin NGL sales.

The following tables present weighted-average sales prices of crude oil, natural gas, and NGLs for the periods presented. Our acquisitions of assets in the Delaware Basin closed in December 2016; therefore, there is no comparative data for the three and sixnine months ended JuneSeptember 30, 2016:

 Three Months Ended June 30, Six Months Ended June 30, Three Months Ended September 30, Nine Months Ended September 30,
Weighted-Average Realized Sales Price by Operating Region     Percentage Change     Percentage Change     Percentage Change     Percentage Change
(excluding net settlements on derivatives) 2017 2016 2017 2016  2017 2016 2017 2016 
Crude oil (per Bbl)                        
Wattenberg Field $46.19
 $40.41
 14.3% $47.46
 $34.51
 37.5% $45.80
 $42.29
 8.3% $46.84
 $37.42
 25.2%
Delaware Basin 44.81
 
 *
 46.73
 
 *
 45.06
 
 *
 46.05
 
 *
Utica Shale 43.19
 39.57
 9.1% 45.05
 33.44
 34.7% 43.03
 38.93
 10.5% 44.51
 35.61
 25.0%
Weighted-average price 45.97
 40.37
 13.9% 47.31
 34.46
 37.3% 45.66
 42.11
 8.4% 46.69
 37.33
 25.1%
Natural gas (per Mcf)                        
Wattenberg Field $2.24
 $1.36
 64.7% $2.30
 $1.38
 66.7% $2.09
 $2.08
 0.5% $2.23
 $1.63
 36.8%
Delaware Basin 1.37
 
 *
 1.60
 
 *
 2.74
 
 *
 2.13
 
 *
Utica Shale 2.76
 1.58
 74.7% 2.88
 1.51
 90.7% 1.81
 1.33
 36.1% 2.56
 1.44
 77.8%
Weighted-average price 2.16
 1.37
 57.7% 2.26
 1.38
 63.8% 2.17
 2.04
 6.4% 2.23
 1.62
 37.7%
NGLs (per Bbl)                        
Wattenberg Field $14.13
 $11.87
 19.0% $16.24
 $9.78
 66.1% $17.49
 $11.07
 58.0% $16.68
 $10.32
 61.6%
Delaware Basin 17.33
 
 *
 19.33
 
 *
 20.87
 
 *
 20.02
 
 *
Utica Shale 17.10
 13.27
 28.9% 22.58
 12.29
 83.7% 22.00
 12.14
 81.2% 22.40
 12.22
 83.3%
Weighted-average price 14.59
 11.93
 22.3% 16.75
 9.89
 69.4% 18.11
 11.12
 62.9% 17.24
 10.41
 65.6%
Crude oil equivalent (per Boe)                        
Wattenberg Field $26.91
 $21.27
 26.5% $27.50
 $19.03
 44.5% $27.33
 $23.77
 15.0% $27.44
 $20.83
 31.7%
Delaware Basin 24.91
 
 *
 27.32
 
 *
 28.07
 
 *
 27.65
 
 *
Utica Shale 25.72
 22.59
 13.9% 28.29
 19.75
 43.2% 23.75
 20.98
 13.2% 26.98
 20.26
 33.2%
Weighted-average price 26.65
 21.33
 24.9% 27.50
 19.07
 44.2% 27.35
 23.62
 15.8% 27.45
 20.80
 32.0%
* Percentage change is not meaningful.
Amounts may not recalculate due to rounding.

During the three months ended September 30, 2017, the weighted-average realized sales price for natural gas in the Delaware Basin was impacted by the entry into a natural gas gathering contract that we accounted for under the gross method of accounting; therefore, our realized price was based on the gross selling price.

Our crude oil, natural gas, and NGLs sales are recorded under either the “net-back” or "gross" method of accounting, depending upon the related purchase agreement. We use the net-back method of accounting for natural gas and NGLs, as well as the majority of our crude oil production from the Wattenberg Field, for all of our crude oil, NGLs, and a portion of our natural gas in the Delaware Basin, and for crude oil from the Utica Shale, as the purchasers of these commodities also provide transportation, gathering, andor processing services. In these situations, the purchaser pays us proceeds based on a percent of the proceeds or have fixed our sales price at index less specified deductions. We sell our commodities at the wellhead, or what is equivalent to the wellhead in situations where we gather multiple wells into larger pads, and collect a price and recognize revenues based on the wellhead sales price, as transportation and processing costs downstream of the wellhead are incurred by the purchaser and therefore embedded in the wellhead price. The net-back method results in the recognition of a net sales
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price that is lower than the indices for which the production is based because the operating costs and profit of the midstream facilities are embedded in the net price we earn.

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PDC ENERGY, INC.

We use the gross method of accounting for Wattenberg Field crude oil delivered through certain pipelines, a portion of our natural gas in the Delaware Basin, and for natural gas and NGLs sales related to production from the Utica Shale, as the purchasers do not provide transportation, gathering, or processing services as a function of the price we earn.receive. Rather, we contract separately with midstream providers for the applicable transport and processing based on a per unit basis. Under this method, we recognize revenues based on the gross selling price and recognize transportation, gathering, and processing expenses.

As discussed above, we enter into agreements for the sale and transportation, gathering, and processing of our production, the terms of which can result in variances in the per unit realized prices that we receive for our crude oil, natural gas and NGLs. Information related to the components and classifications in the condensed consolidated statements of operations is shown below. For crude oil, the average NYMEX prices shown below are based upon average daily prices throughout each month and our natural gas average NYMEX pricing is based upon first-of-the-month index prices as this is the method used to sell the majority of each of these commodities pursuant to terms of the respective sales agreements.  For NGLs, we use the NYMEX crude oil price as a reference for presentation purposes. The average realized price both before and after transportation, gathering, and processing expenses shown in the table below represents our approximate composite per barrel price for NGLs.
For the three months ended
June 30, 2017
 Average NYMEX Price Average Realization Percentage Before Transportation, Gathering and Processing Expenses Average Realized Price Before Transportation, Gathering and Processing Expenses Average Transportation, Gathering and Processing Expenses Average Realized Price After Transportation, Gathering and Processing Expenses
For the three months ended
September 30, 2017
 Average NYMEX Price Average Realization Percentage Before Transportation, Gathering and Processing Expenses Average Realized Price Before Transportation, Gathering and Processing Expenses Average Transportation, Gathering and Processing Expenses Average Realized Price After Transportation, Gathering and Processing Expenses
Crude oil (per Bbl) $48.28
 95% $45.97
 $1.38
 $44.59
 $48.20
 95% $45.66
 $1.41
 $44.25
Natural gas (per MMBtu) 3.18
 68% 2.16
 0.08
 2.08
 3.00
 72% 2.17
 0.24
 1.93
NGLs (per Bbl) 48.28
 30% 14.59
 0.31
 14.28
 48.20
 38% 18.11
 0.25
 17.86
Crude oil equivalent (per Boe) 37.48
 71% 26.65
 0.81
 25.84
 36.92
 74% 27.35
 1.15
 26.20
                    
For the three months ended
June 30, 2016
 Average NYMEX Price Average Realization Percentage Before Transportation, Gathering and Processing Expenses Average Realized Price Before Transportation, Gathering and Processing Expenses Average Transportation, Gathering and Processing Expenses Average Realized Price After Transportation, Gathering and Processing Expenses
For the three months ended
September 30, 2016
 Average NYMEX Price Average Realization Percentage Before Transportation, Gathering and Processing Expenses Average Realized Price Before Transportation, Gathering and Processing Expenses Average Transportation, Gathering and Processing Expenses Average Realized Price After Transportation, Gathering and Processing Expenses
Crude oil (per Bbl) $45.59
 89% $40.37
 $1.63
 $38.74
 $44.94
 94% $42.11
 $1.52
 $40.59
Natural gas (per MMBtu) 1.95
 70% 1.37
 0.07
 1.30
 2.81
 73% 2.04
 0.08
 1.96
NGLs (per Bbl) 45.59
 26% 11.93
 0.26
 11.67
 44.94
 25% 11.12
 0.29
 10.83
Crude oil equivalent (per Boe) 31.82
 67% 21.33
 0.86
 20.47
 34.48
 69% 23.62
 0.84
 22.78
    
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For the six months ended
June 30, 2017
 Average NYMEX Price Average Realization Percentage Before Transportation, Gathering and Processing Expenses Average Realized Price Before Transportation, Gathering and Processing Expenses Average Transportation, Gathering and Processing Expenses Average Realized Price After Transportation, Gathering and Processing Expenses
For the nine months ended
September 30, 2017
 Average NYMEX Price Average Realization Percentage Before Transportation, Gathering and Processing Expenses Average Realized Price Before Transportation, Gathering and Processing Expenses Average Transportation, Gathering and Processing Expenses Average Realized Price After Transportation, Gathering and Processing Expenses
Crude oil (per Bbl) $50.10
 94% $47.31
 $1.44
 $45.87
 $49.47
 94% $46.69
 $1.42
 $45.27
Natural gas (per MMBtu) 3.25
 70% 2.26
 0.09
 2.17
 3.17
 70% 2.23
 0.15
 2.08
NGLs (per Bbl) 50.10
 33% 16.75
 0.35
 16.40
 49.47
 35% 17.24
 0.29
 16.95
Crude oil equivalent (per Boe) 38.50
 71% 27.50
 0.84
 26.66
 37.99
 72% 27.45
 0.96
 26.49
                    
For the six months ended
June 30, 2016
 Average NYMEX Price Average Realization Percentage Before Transportation, Gathering and Processing Expenses Average Realized Price Before Transportation, Gathering and Processing Expenses Average Transportation, Gathering and Processing Expenses Average Realized Price After Transportation, Gathering and Processing Expenses
For the nine months ended
September 30, 2016
 Average NYMEX Price Average Realization Percentage Before Transportation, Gathering and Processing Expenses Average Realized Price Before Transportation, Gathering and Processing Expenses Average Transportation, Gathering and Processing Expenses Average Realized Price After Transportation, Gathering and Processing Expenses
Crude oil (per Bbl) $39.52
 87% $34.46
 $1.58
 $32.88
 $41.33
 90% $37.33
 $1.56
 $35.77
Natural gas (per MMBtu) 2.02
 68% 1.38
 0.08
 1.30
 2.29
 71% 1.62
 0.08
 1.54
NGLs (per Bbl) 39.52
 25% 9.89
 0.28
 9.61
 41.33
 25% 10.41
 0.29
 10.12
Crude oil equivalent (per Boe) 28.60
 67% 19.07
 0.87
 18.20
 30.61
 68% 20.80
 0.86
 19.94

Commodity Price Risk Management, Net

We use commodity derivative instruments to manage fluctuations in crude oil, natural gas, and NGLs prices. We have in place a variety of collars, fixed-price swaps, and basis swaps on a portion of our estimated crude oil, natural gas, and propane production. Because we sell all of our crude oil, natural gas, and NGLs production at prices related to the indexes inherent into our underlying derivative instruments, we ultimately realize value related to our collars of no less than the floor and no more than the ceiling. For our commodity swaps, we ultimately realize the fixed price value related to the swaps. See the footnote titled Commodity Derivative Financial Instruments for a detailed presentation of our derivative positions as of JuneSeptember 30, 2017.

Commodity price risk management, net, includes cash settlements upon maturity of our derivative instruments, andas well as the change in fair value of unsettled commodity derivatives related to our crude oil, natural gas, and propane production. Commodity price risk management, net, does not include derivative transactions related to our gas marketing, which are included in other income and other expenses.

Net settlements of commodity derivative instruments are based on the difference between the crude oil, natural gas, and propane index prices at the settlement date of our commodity derivative instruments compared to the respective strike prices contracted for the settlement months that were established at the time we entered into the commodity derivative transaction. The net change in fair value of unsettled commodity derivatives is comprised of the net value increase or decrease in the beginning-of-period fair value of commodity derivative instruments that settled during the period, and the net change in fair value of unsettled commodity derivatives during the period or from inception of any new contracts entered into during the applicable period. The corresponding impact of settlement of the commodity derivative instruments during the period is included in net settlements for the period. The net change in fair value of unsettled commodity derivatives during the period is primarily related to shifts in the crude oil, natural gas, and NGLs forward curves and changes in certain differentials.
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The following table presents net settlements and net change in fair value of unsettled derivatives included in commodity price risk management, net:

Three Months Ended June 30, Six Months Ended June 30,Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 20162017 2016 2017 2016
(in millions)(in millions)
Commodity price risk management gain (loss), net:              
Net settlements of commodity derivative instruments:              
Crude oil fixed price swaps and collars$5.1
 $38.7
 $1.9
 $92.0
$5.4
 $39.5
 $7.4
 $131.6
Natural gas fixed price swaps and collars4.8
 14.6
 8.5
 28.1
5.1
 7.7
 13.5
 35.8
Natural gas basis protection swaps2.0
 
 2.0
 
1.2
 0.5
 3.3
 0.5
NGLs (propane portion) fixed price swaps0.1
 
 0.1
 
(2.1) 
 (2.0) 
Total net settlements of commodity derivative instruments12.0
 53.3
 12.5
 120.1
9.6
 47.7
 22.2
 167.9
Change in fair value of unsettled commodity derivative instruments:              
Reclassification of settlements included in prior period changes in fair value of commodity derivative instruments(5.1) (60.8) 18.4
 (115.5)(15.6) (40.6) 31.0
 (169.5)
Crude oil fixed price swaps and collars43.1
 (57.8) 88.7
 (62.8)(40.0) 4.8
 26.3
 (48.3)
Natural gas fixed price swaps and collars8.3
 (27.5) 16.7
 (23.1)(2.1) 6.1
 9.2
 (13.1)
Natural gas basis protection swaps(0.2) 
 2.3
 (0.4)1.5
 1.4
 3.4
 0.7
NGLs (propane portion) fixed price swaps(0.2) 
 
 
(5.6) 
 (5.6) 
Net change in fair value of unsettled commodity derivative instruments45.9
 (146.1) 126.1
 (201.8)(61.8) (28.3) 64.3
 (230.2)
Total commodity price risk management gain (loss), net$57.9
 $(92.8) $138.6
 $(81.7)$(52.2) $19.4
 $86.5
 $(62.3)

Net settlements of commodity derivatives decreased for the three and sixnine months ended JuneSeptember 30, 2017, as compared to the three and sixnine months ended JuneSeptember 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 had settled by the end of 2016.  Net settlements for the three and sixnine months ended JuneSeptember 30, 2017, reflect derivative instruments entered into since 2015, which more closely approximate recent realized prices.  Based upon the forward strip pricing at JuneSeptember 30, 2017, we expect that settlements will continue to be substantially lower in 2017 on a relative basis as compared to those in 2016.

Lease Operating Expenses

Lease operating expenses improvedincreased to $2.50$2.98 per Boe and $2.72$2.81 per Boe during the three and sixnine months ended JuneSeptember 30, 2017, respectively, compared to $2.63$2.33 per Boe and $2.97$2.73 per Boe during the three and sixnine months ended JuneSeptember 30, 2016, respectively. The improvement inOur lease operating expenseexpenses per Boe was predominately driven by production growth of 54 percent and 50 percentwere $2.50 per Boe during the three and six months ended June 30, 2017 respectively, which was partially offset by higher lease operating expense of $4.88and $2.98 per Boe and $5.53during the three months ended March 31, 2017. Our per Boe costs have increased compared to prior year periods primarily due to the expected higher per Boe costs in the Delaware BasinBasin. The per Boe costs during the three and six months ended JuneSeptember 30, 2017 respectively.increased as compared to the three months ended September 30, 2016, primarily due to increases of $0.19 per Boe for water disposal, $0.15 per Boe for environmental remediation costs, and $0.14 per Boe for increased workover projects.

Aggregate lease operating expenses during the three months ended JuneSeptember 30, 2017, increased $6.4$11.4 million as compared to the three months ended JuneSeptember 30, 2016, of which $4.5$7.2 million related to our recently-acquired properties in the Delaware Basin.The increase of $6.4$11.4 million is primarily due to increases of $2.4$2.9 million for payroll and employee benefits related to increases in headcount, for 2017 as compared to 2016, $1.0$1.9 million for produced water hauling, $1.0disposal, $1.8 million for increased workover projects, $1.5 million for environmental remediation costs, and $1.3 million related to additional compressor rentals and $0.5 million for workover projects. These increases were partially offset by a decrease of $0.4 million in environmental remediation costs.to combat increased gathering system line pressures.

Aggregate lease operating expenses during the sixnine months ended JuneSeptember 30, 2017, increased $10.8$22.2 million as compared to the sixnine months ended JuneSeptember 30, 2016, of which $8.4$15.6 million related to our recently-acquired properties in the Delaware Basin. The increase of $10.8$22.2 million is primarily due to increases of $4.2$7.2 million for payroll and employee benefits related to increases in headcount, for 2017 as compared to 2016, $1.8$3.7 million for produced water hauling, $1.7disposal, $3.5 million for workover projects, and $1.7$3.1 million related to
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additional compressor rentals. These increases were partially offset by a decrease of $1.6rentals to combat increased gathering system line pressures, and $2.5 million in environmental remediation costs.related to vehicle and equipment expenses. We expect continued increases in our headcount through the remainder of 2017 as we grow our Delaware
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Basin production base and production team. WeOn a per unit basis, we expect much of this increased cost of personnel will be offset by increases in our production.

Production Taxes

Production taxes are comprised mainly of severance tax and ad valorem tax and are directly related to crude oil, natural gas, and NGLs sales and are generally assessed as a percentage of net revenues. ThereFrom time-to-time, there are a number of adjustments to the statutory rates for these taxes based upon certain credits that are determined based upon activity levels and relative commodity prices from year-to-year. The $9.0$5.9 million and $17.3$23.3 million increases in production taxes during the three and sixnine months ended JuneSeptember 30, 2017, respectively, compared to the three and sixnine months ended JuneSeptember 30, 2016 were primarily related to the 9364 percent and 11794 percent increases in crude oil, natural gas, and NGLs sales, and an increase in our effective tax rate to approximately seven percent for the three and six months ended June 30, 2017 as compared to five percent for the three and six months ended June 30, 2016.sales.

Transportation, Gathering, and Processing Expenses

Transportation,gathering, and processing expenses increased $2.0$4.7 million and $3.9$8.6 million during the three and sixnine months ended JuneSeptember 30, 2017, respectively, compared to the three and sixnine months ended JuneSeptember 30, 2016. The primary drivers of these increases were $1.2$1.3 million and $2.2$3.7 million increases in oil transportation costs due to increased volumes delivered through a pipeline in the Wattenberg Field and increases of $0.7$3.8 million and $1.4$5.2 million, respectively, related to natural gas gathering and transportation operations in our recently acquired properties in the Delaware Basin, respectively.Basin. The increases during the three and nine months ended September 30, 2017 were slightly offset by decreases related to lower production in the Utica Shale. When feasible, we use pipelines in the Wattenberg Field to deliver crude oil to the market in an effort to decrease field truck traffic and air emissions. Transportation, gathering, and processing expenses per Boe improvedincreased to $0.81$1.15 and $0.84$0.96 for the three and sixnine months ended JuneSeptember 30, 2017, respectively, compared to $0.86$0.84 and $0.87$0.86 for the three and sixnine months ended JuneSeptember 30, 2016, respectively. As disclosed previously in this section, there is an interaction with the marketing contracts in determining if transportation, gathering, and processing costs are presented separately or presented net in the revenue section of our financial statements; therefore, the net realized price analysis is a useful analysis to understand our net realized prices.

Exploration, Geologic, and Geophysical Expense

The following table presents the major components of exploration, geologic, and geophysical expense:
 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
 (in millions)
        
Exploratory dry hole costs$41.2
 $
 $41.2
 $
Geological and geophysical costs, including seismic purchases0.5
 
 1.8
 
Operating, personnel and other0.2
 0.2
 0.9
 0.7
Total exploration, geologic, and geophysical expense$41.9
 $0.2
 $43.9
 $0.7
        

Exploratory dry hole costs. During the three and nine months ended September 30, 2017, two exploratory dry hole wells, associated lease costs, and related infrastructure assets in the Delaware Basin were expensed at a cost of $41.2 million. The conclusion to expense these items was due to the determination that the acreage on which these wells were drilled was exploratory in nature and, following drilling, the lack of hydrocarbon production necessary for the wells to be deemed economically viable.
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Impairment of Properties and Equipment
    
The following table sets forth the major components of our impairment of properties and equipment expense:

 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
 (in millions)
        
Impairment of unproved properties$252.6
 $0.3
 $282.2
 $2.4
Amortization of individually insignificant unproved properties0.1
 0.6
 0.3
 0.7
Impairment of crude oil and natural gas properties
252.7
 0.9
 282.5
 3.1
Land and buildings
 
 
 3.0
Total impairment of properties and equipment$252.7
 $0.9
 $282.5
 $6.1

Impairment of proved and unproved properties. Amounts represent the retirement or expiration of certain leases that are no longer part of our development plan or that we aredo not ableplan to extend priorand will allow to termination of the lease.expire. Deterioration of commodity prices or other operating circumstances could result in additional impairment charges as such a change could decrease the number of wells drilled in future periods.

During the three months ended JuneSeptember 30, 2017, we impaired certain unproved Delaware Basin leasehold positions totaling $27.0 million that expired duringrecorded a charge related to two exploratory dry holes we had drilled in the three months ending June 30, 2017, or are projected to expire between June 30, 2017 and December 31, 2017.  Subsequent to closing the acquisitionswestern area of our Culberson County acreage in the Delaware Basin, itas referenced previously.  We then assessed the impact of the dry holes and various factors related thereto, including (i) the operational and geologic data obtained, (ii) the current increased cost environment for drilling and completion services in the Delaware, (iii) our decreased future commodity price outlook, and (iv) the terms of  the related lease agreements.  Based on the results of this assessment, we concluded that the underlying geologic risk and the challenged economics of future capital expenditures reduced the likelihood that we would perform future development in this area over the remaining lease term for this acreage.  Accordingly, we recorded an impairment of $251.6 million covering approximately 13,400 acres during the third quarter of 2017.  The amount of the impairment was based on the value assigned to individual lease acres in the final purchase price allocation of the business combination.  This allocation had included the consideration paid to the sellers, including the effect of the non-cash impact from the deferred tax liability created at the time of the acquisition. Due to the aforementioned events and circumstances in the third quarter of 2017, we evaluated our proved property for possible impairment and concluded that these assets were not impaired during the period.

Impairment of Goodwill

The final goodwill that resulted from the purchase price allocation of the assets acquired in the Delaware Basin was determined thatto be $75.1 million. With the creation of goodwill from this transaction, we expected to perform our evaluation of goodwill for impairment annually in the fourth quarter. However, primarily due to a combination of increases in per well development and operational costs and our drilling of two exploratory dry holes in the Delaware Basin since the time of the acquisition, in conjunction with our lower future commodity price outlook, we determined a triggering event had occurred in the quarter ended September 30, 2017. In addition to the factors mentioned above, we also considered our recent impairments of certain acreage tracts would not meetunproven leasehold costs, and the impact of these items on our internal expectations for acceptable rates of return duereturn. We evaluated goodwill for impairment by performing a quantitative test, which involves comparing the estimated fair value of the goodwill asset group, which we define as the Delaware Basin, to the carrying value. We determined the fair value of the goodwill at September 30, 2017 by using an estimated after-tax future discounted cash flow analysis, along with a combination of weakening commodity prices; higher per well developmentmarket-based pricing factors for similar acreage, reserve valuation techniques, and operational costs;other fair value considerations. The discounted cash flow analysis used to estimate fair value was based on known or knowable information at the interim measurement date. Fair value determinations require considerable judgment and updated technical analysis.  Asare sensitive to changes in underlying assumptions and factors. The quantitative test resulted in a result, we allowed or expect to allow certain acreage to expire, anddetermination that a full impairment charge of $75.1 million was required; therefore, the charge was recorded in other circumstances we were unable to obtain necessary lease term extensions.

The following table sets forth the major components of our impairment of properties and equipment expense:

 Three Months Ended June 30, Six Months Ended June 30,
 2017 2016 2017 2016
 (in millions)
        
Impairment of unproved properties$27.5
 $1.1
 $29.6
 $2.1
Amortization of individually insignificant unproved properties0.1
 0.1
 0.2
 0.1
Impairment of crude oil and natural gas properties
27.6
 1.2
 29.8
 2.2
Land and buildings
 3.0
 
 3.0
Total impairment of properties and equipment$27.6
 $4.2
 $29.8
 $5.2
quarter ended September 30, 2017.

General and Administrative Expense

General and administrative expense increased $6.0decreased $3.2 million for the three months ended JuneSeptember 30, 2017, as compared to the three months ended JuneSeptember 30, 2016,2016. The decrease of which $2.9 million is related to the Delaware Basin. The increase of $6.0$3.2 million was primarily attributable to a decrease of $10.2 million in professional fees related to the Delaware Basin acquisition that were incurred in 2016, partially offset by
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increases of $1.5$3.7 million in payroll and employee benefits related to an increase in headcount for 2017
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as compared to 2016, $1.1$2.0 million related to professional services, and $0.4$0.8 million in software maintenance agreements and subscriptions.for adjustments to the accounts receivable allowance.

General and administrative expense increased $9.5$6.3 million for the sixnine months ended JuneSeptember 30, 2017, as compared to the sixnine months ended JuneSeptember 30, 2016, of which $5.7 million is related to the Delaware Basin.2016. The increase of $9.5$6.3 million was primarily attributable to increases of $3.8$7.5 million in payroll and employee benefits due to an increase in headcount for 2017 as compared to 2016, $1.8$2.9 million related to professional services, $0.7$2.4 million related to legal settlements, $1.0 million in software maintenance agreements and subscriptions, and $0.7$1.0 million in rent expense. The increases were partially offset by a decrease of $10.2 million in professional fees related to the Delaware Basin acquisition during the third quarter of 2016. We expect continued increases in our headcount through the remainder of 2017 as we build out our Delaware Basin operations.operations and the associated supporting service elements.
    
Depreciation, Depletion and Amortization Expense

Crude oil and natural gas properties. DD&A expense related to crude oil and natural gas properties is directly related to proved reserves and production volumes. DD&A expense related to crude oil and natural gas properties was $124.4$123.6 million and $232.2$355.7 million for the three and sixnine months ended JuneSeptember 30, 2017, respectively, compared to $106.1$112.1 million and $202.4$314.4 million for the three and sixnine months ended JuneSeptember 30, 2016, respectively. Through June 30, 2017, our capital investment in the Delaware Basin has not yet resulted in the addition of related proved reserves, resulting in an elevated DD&A expense rate for the three and six months ended June 30, 2017.

The period-over-period change in DD&A expense related to crude oil and natural gas properties was primarily due to the following:
 June 30, 2017 September 30, 2017
 Three Months Ended Six Months Ended Three Months Ended Nine Months Ended
 (in millions) (in millions)
Increase in production $56.2
 $94.9
 $44.5
 $138.5
Decrease in weighted-average depreciation, depletion and amortization rates (37.9) (65.1) (33.0) (97.2)
Total increase in DD&A expense related to crude oil and natural gas properties $18.3
 $29.8
 $11.5
 $41.3

The following table presents our per Boe DD&A expense rates for crude oil and natural gas properties:

 Three Months Ended June 30, Six Months Ended June 30, Three Months Ended September 30, Nine Months Ended September 30,
Operating Region/Area 2017 2016 2017 2016 2017 2016 2017 2016
 (per Boe) (per Boe)
Wattenberg Field $15.30
 $20.73
 $16.05
 $21.19
 $14.60
 $19.17
 $15.53
 $20.42
Delaware Basin 18.14
 
 15.46
 
 15.14
 
 15.32
 
Utica Shale 11.27
 13.84
 11.26
 11.16
 7.64
 9.59
 10.21
 10.52
Total weighted-average 15.51
 20.41
 15.83
 20.72
 14.52
 18.66
 15.35
 19.94

During the three months ended September 30, 2017, as part of plans to divest the Utica Shale properties, we engaged an investment banking group and began actively marketing the properties for sale; therefore, these properties are classified as held-for-sale as they met the criteria for such classification at the beginning of September 2017. As a result of the properties being classified as held-for-sale, we stopped recording DD&A expense on these properties during the three month period ended September 30, 2017, which has lowered the rate for the quarter.

Non-crude oil and natural gas properties. Depreciation expense for non-crude oil and natural gas properties was $1.7 million and $3.2$4.8 million for the three and sixnine months ended JuneSeptember 30, 2017, respectively, compared to $0.9 million and $2.0$2.9 million for the three and sixnine months ended JuneSeptember 30, 2016, respectively.

Provision for Uncollectible Notes Receivable

In the first quarter of 2016, we recorded a provision for uncollectible notes receivable of $44.7 million to impair two third-party notes receivable whose collection was not reasonably assured. As described in the footnote titled Fair Value of Financial Instruments, in April 2017, we signed a definitive agreement and simultaneously closed on the sale of one of the associated notes receivable to an unrelated third-party. Accordingly, we reversed $40.2 million of the provision for
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uncollectible notes receivable during the threenine months ended JuneSeptember 30, 2017, since all cash was collected in April 2017 from the sale of the Promissory Note.note.

Interest Expense

Interest expense increased $8.9decreased $0.9 million to $19.6$19.3 million for the three months ended JuneSeptember 30, 2017 compared to $10.7$20.2 million for the three months ended JuneSeptember 30, 2016. The increasedecrease is primarily attributable to a $6.4$9.0 million charge for a bridge loan commitment related to acquisitions of properties in the Delaware Basin during the three months ended September 30, 2016 and a $0.4 million decrease in interest expense on our 2016 Convertible Notes, which were settled in May 2016. The decreases were partially offset by a $5.3 million increase in interest
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relating to the issuance of our 2024 Senior Notes, a $2.6 million increase in interest expense relating to the issuance of our 2021 Convertible Notes, and a $0.9 million increase related to fees for the redetermination of the borrowing base under our revolving credit facility. These increases were partially offset by a $1.3 million decrease in interest expense on our 2016 Convertible Notes, which were settled in May 2016.

Interest expense increased $16.5$15.6 million to $39.1$58.4 million for the sixnine months ended JuneSeptember 30, 2017 compared to $22.6$42.8 million for the sixnine months ended JuneSeptember 30, 2016. The increase is primarily attributable to a $12.7an $18.0 million increase in interest expense relating to the issuance of our 2024 Senior Notes, a $5.1$7.7 million increase in interest expense relating to the issuance of our 2021 Convertible Notes, and a $1.6$2.5 million increase related to fees for the redetermination of the borrowing base under our revolving credit facility. These increases were partially offset by a $3.4$9.0 million charge for the bridge loan commitment related to acquisitions of properties in the Delaware Basin during the three months ended September 30, 2016 and a $3.9 million decrease in interest expense on our 2016 Convertible Notes, which were settled in May 2016.

Provision for Income Taxes

The effective income tax rates for the three and sixnine months ended JuneSeptember 30, 2017 were 37.329.5 percent and 36.825.8 percent expensebenefit on income,loss, respectively, compared to 37.934.0 percent and 37.537.1 percent benefit on loss for the three and sixnine months ended JuneSeptember 30, 2016, respectively. The most significant element related to the decrease in the effective income tax rate was the impact from the impairment of the goodwill in the quarter ended September 30, 2017. This goodwill did not have an associated deferred tax liability associated with the goodwill at the time it was created, therefore, no deferred tax benefit was realized upon the impairment of the goodwill. The effective income tax rates are based upon a full year forecasted pre-tax incomeloss for the year adjusted for permanent differences. The forecasted full year effective income tax rate has been applied to the quarter-to-date pre-tax income,loss, resulting in an income tax expensebenefit for the period. Because the estimate of full-year income or loss may change from quarter to quarter, the effective income tax rate for any particular quarter may not have a meaningful relationship to pre-tax income or loss for the quarter or the actual annual effective income tax rate that is determined at the end of the year. TheIn addition to the impact from the goodwill impairment, the effective income tax ratesrate for the three and six months ended JuneSeptember 30, 2017 includeincludes discrete income tax benefits of $0.2$0.8 million for additional deductions and credits claimed on the filed 2016 federal and state income tax returns. The effective income tax rate for the nine months ended September 30, 2017 includes discrete income tax benefits of $1.8 million relating to the excess income tax basisbenefit recognized with the vesting of stock awards and $0.8 million for additional deductions and credits claimed on the filed 2016 federal and state tax returns. These discrete tax benefits during the three and sixnine months ended JuneSeptember 30, 2017 which resulted in a 0.30.2 percent and 1.30.9 percent reductionincrease to our effective income tax rates. There were no significant discrete income tax items recorded during the three months ended June 30, 2016.

Net Income (Loss)/Adjusted Net Income (Loss)
 
The factors resulting in changes in net incomeloss in the three and sixnine months ended JuneSeptember 30, 2017 of $41.2$292.5 million and $87.4$205.1 million, respectively, and a net loss in the three and sixnine months ended JuneSeptember 30, 2016 of $95.5$23.3 million and $167.0$190.3 million, respectively, are discussed above. These same reasons similarly impacted adjusted net income (loss),loss, a non-U.S. GAAP financial measure, with the exception of the tax affected net change in fair value of unsettled derivatives adjusted for taxes, of $28.7$38.6 million and $78.9$40.3 million for the three and sixnine months ended JuneSeptember 30, 2017, respectively, and $90.5$17.5 million and $125.1$142.6 million for the three and sixnine months ended JuneSeptember 30, 2016, respectively. Adjusted net income (loss),loss, a non-U.S. GAAP financial measure, was $12.5$253.9 million and $8.5$245.4 million for the three and sixnine months ended JuneSeptember 30, 2017, respectively, and adjusted net loss of $5.0was $5.8 million and $41.9$47.7 million for the three and sixnine months ended JuneSeptember 30, 2016, respectively. See Reconciliation of Non-U.S. GAAP Financial Measures, below for a more detailed discussion of this non-U.S. GAAP financial measure and a reconciliation of this measure to the most comparable U.S. GAAP measure.

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PDC ENERGY, INC.

Financial Condition, Liquidity and Capital Resources

Our primary sources of liquidity are cash flows from operating activities, our revolving credit facility, proceeds raised in debt and equity capital market transactions, and asset sales. For the sixnine months ended JuneSeptember 30, 2017, our net cash flows from operating activities were $263.2$411.4 million.

Our primary source of cash flows from operating activities is the sale of crude oil, natural gas, and NGLs. Fluctuations in our operating cash flows are principally driven by commodity prices and changes in our production volumes. Commodity prices have historically been volatile and we manage a portion of this volatility through our use of derivative instruments. We enter into commodity derivative instruments with maturities of no greater than five years from the date of the instrument. Our revolving credit agreementfacility imposes limits on the amount of our production we can hedge, and we may choose not to hedge the maximum amounts permitted. Therefore, we may still have significant fluctuations in our cash flows from operating activities due to the remaining non-hedged portion of our future production. Based upon our hedge position and assuming forward strip pricing as of JuneSeptember 30, 2017, our derivatives may not be a significant source of cash flow in the near term.

Our working capital fluctuates for various reasons, including, but not limited to, changes in the fair value of our commodity derivative instruments and changes in our cash and cash equivalents due to our practice of utilizing excess cash to reduce the outstanding borrowings under our revolving credit facility. At JuneSeptember 30, 2017, we had a working capital deficit of $39.1 million compared to working capital of $65.6 million compared to $129.2 million at December 31, 2016. The decrease in working capital as of JuneSeptember 30, 2017 is primarily the result of a decrease in cash and cash equivalents of $41.8$107.7 million related to capital investment exceeding operating cash flows
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PDC ENERGY, INC.

andan increase in accounts payable of $86.2$97.8 million related to increased development and exploration activity, which was partially offset by an increase in the net fair value of our unsettled commodity derivative instruments of $86.8$41.7 million.

Our cash and cash equivalents were $202.3$136.4 million at JuneSeptember 30, 2017 and availability under our revolving credit facility was $700.0 million, providing for a total liquidity position of $902.3$836.4 million as of JuneSeptember 30, 2017. Our liquidity was augmented in 2017 by the $40.2 million of proceeds received in the second quarter of 2017 from the sale of the Promissory Note, as described previously. We anticipate that our capital investments will exceed our cash flows from operating activities in 2017, resulting in cash2017. With this outspend, along with the expected closing of the acquisition of certain properties owned by Bayswater and cash equivalents estimatedcertain related parties, we expect to be between $100 million to $150 million as ofhave borrowings on our revolving credit facility at December 31, 2017.

Based on our expected cash flows from operations, our cash and cash equivalents and availability under our revolving credit facility, we believe that we have sufficient capital to fund our planned activities during 2017. Our liquidity was further augmented by the $40.2 million of proceeds received in the second quarter of 2017 from the sale of the Promissory Note, as described previously.

Our revolving credit facility is a borrowing base facility and availability under the facility is subject to redetermination generally each May and November, based upon a quantification of our proved reserves at each December 31 and June 30, and December 31, respectively. The maturity date of our revolving credit facility is May 2020. Our ability to borrow under the revolving credit facility is limited under our 2022 Senior Notes to the greater of $700 million or the calculated value under an Adjusted Consolidated Tangible Net Asset test, as defined.

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

In October 2017, we entered into a Sixth Amendment to the Third Amended and Restated Credit Agreement. The amendment amends the revolving credit facility to allow the borrowing base to increase above the maximum allowable borrowing capacity of $1.0 billion. We have elected to increase the borrowing base to $1.1 billion for our fall 2017 borrowing base redetermination and have elected to maintain a $700 million commitment level as of the date of this report.

Amounts borrowed under the revolving credit facility bear interest at either an alternate base rate option or a LIBOR option as defined in the revolving credit facility plus an applicable margin, depending on the percentage of the commitment that has been utilized. As of JuneSeptember 30, 2017, the applicable 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 0.500.5 percent.

We had no balance outstanding on our revolving credit facility as of JuneSeptember 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
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provider to secure a 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 JuneSeptember 30, 2017, the available funds under our revolving credit facility waswere $700 million based on our elected commitment level.

Our revolving credit facility contains financial maintenance covenants. The covenants require that we maintain (i) a leverage ratio defined as total debt of less than 4.0 times the trailing 12 months earnings before interest, taxes, depreciation, depletion and amortization, change in fair value of unsettled commodity derivatives, exploration expense, gains (losses) on sales of assets and other non-cash gains (losses) and (ii) an adjusted current ratio of at least 1.0:1.0. Our adjusted current ratio is adjusted by eliminating the impact on our current assets and liabilities of recording the fair value of crude oil and natural gas commodity derivative instruments. Additionally, available borrowings under our revolving credit facility are added to the current asset calculation and the current portion of our revolving credit facility debt is eliminated from the current liabilities calculation. At JuneSeptember 30, 2017, we were in compliance with all debt covenants, as defined by the revolving credit agreement, with a leverage ratio of 1.91.8 and a current ratio of 3.3.2.9. We expect to remain in compliance throughout the next 12-month period.

The indentures governing our 2022 Senior Notes and 2024 Senior Notes contain customary restrictive covenants that, among other things, limit our ability and the ability of our restricted subsidiaries to: (a) incur additional debt including under our revolving credit facility, (b) make certain investments or pay dividends or distributions on our capital stock or purchase, redeem, or retire capital stock, (c) sell assets, including capital stock of our restricted subsidiaries, (d) restrict the payment of dividends or other payments by restricted subsidiaries to us, (e) create liens that secure debt, (f) enter into transactions with affiliates, and (g) merge or consolidate with another company. At JuneSeptember 30, 2017, we were in compliance with all covenants and expect to remain in compliance throughout the next 12-month period.

In January 2017, pursuant to the filing of the supplemental indentures for the 2021 Convertible Senior Notes, the 2022 Senior Notes, and the 2024 Senior Notes, our subsidiary PDC Permian, Inc. became a guarantor of the notes.

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PDC ENERGY, INC.

Cash Flows

Operating Activities. Our net cash flows from operating activities are primarily impacted by commodity prices, production volumes, net settlements from our commodity derivative positions, operating costs, and general and administrative expenses. Cash flows from operating activities increased by $65.4$50.6 million to $411.4 million for the sixnine months ended JuneSeptember 30, 2017 compared to the sixnine months ended JuneSeptember 30, 2016, primarily due to increases in crude oil, natural gas and NGLs sales of $217.1 million and an increase in changes in assets and liabilities of $12.3 million related to the timing of cash payments and receipts.$308.0 million. These increases were offset in part by a decrease in commodity derivative settlements of $107.6$145.7 million and a decrease in changes in assets and liabilities of $30.8 million related to the timing of cash payments and increases in production taxes of $17.3 million, interest expense of $16.5$23.3 million, lease operating expenses of $10.8$22.2 million, interest expense of $15.6 million, transportation, gathering, and processing expenses of $8.6 million, and general and administrative expenses of $9.5$6.3 million.

Adjusted cash flows from operations, a non-U.S. GAAP financial measure, increased $53.0by $81.3 million to $407.5 million during the sixnine months ended JuneSeptember 30, 2017 compared to the sixnine months ended JuneSeptember 30, 2016. The increase was primarily due to the same factors mentioned above for changes in cash flows provided by operating activities, without regard to timing of cash payments and receipts of assets and liabilities.  Adjusted EBITDAX, a non-U.S. GAAP financial measure, increased by $150.4$184.3 million during the sixnine months ended JuneSeptember 30, 2017, compared to the sixnine months ended JuneSeptember 30, 2016. The increase was primarily the result of increases in crude oil, natural gas and NGLs sales of $217.1$308.0 million, the recording of a provision for uncollectible notes receivable of $44.7 million during the sixnine months ended JuneSeptember 30, 2016, and the reversal of a provision for uncollectible notes receivable of $40.2 million during the sixnine months ended JuneSeptember 30, 2017.  These increases were partially offset by a decrease in commodity derivative settlements of $107.6$145.7 million and increases in production taxes of $17.3$23.3 million, lease operating expenses of $10.8$22.2 million, transportation, gathering, and processing expenses of $8.6 million, and general and administrative expenses of $9.5$6.3 million. See Reconciliation of Non-U.S. GAAP Financial Measures, below, for a more detailed discussion of non-U.S. GAAP financial measures.

Investing Activities. Because crude oil and natural gas production from a well declines rapidly in the first few years of production, we need to continue to commit significant amounts of capital in order to maintain and grow our production and replace our reserves. If capital is not available or is constrained in the future, we will be limited to our cash flows from operations and liquidity under our revolving credit facility as the sources for funding our capital investments.

Cash flows from investing activities primarily consist of the acquisition, exploration, and development of crude oil and natural gas properties, net of dispositions of crude oil and natural gas properties. Net cash used in investing activities of $299.1$512.8 million during the sixnine months ended JuneSeptember 30, 2017, was primarily related to cash utilized for our drilling operations, including completion activities of $334.4$528.9 million, $21.0 million deposit toward the purchase price of the acquisition of certain
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properties owned by Bayswater and certain related parties, purchases of short-term investments of $49.9 million, and a $9.3 million deposit with a third-party transportation service provider for surety of an existing firm transportation obligation previously secured by a letter of credit.  Partially offsetting these investments was the receipt of approximately $49.9 million related to the sale of short-term investments, $40.2 million from the sale of the Promissory Note, and $5.4 million related to post-closing settlements of properties acquired in 2016.

Financing Activities. Net cash from financing activities for the sixnine months ended JuneSeptember 30, 2017 decreased by approximately $147.2$1,291.1 million compared to the sixnine months ended JuneSeptember 30, 2016. Certain capital markets and financing activities occurred in 2016 including $296.6$855.1 million received from an issuance of our common stock.stock, $392.3 million of proceeds from the issuance of the 2024 Senior Notes, and the $194.0 million of proceeds from the issuance of the 2021 Convertible Notes. These amounts were partially offset by the $115.0 million payment of principal amounts owed upon the maturity of the 2016 Convertible Notes and net payments of approximately $37.0 million to pay down amounts borrowed under our revolving credit facility in the first quarter of 2016.

Off-Balance Sheet Arrangements

At JuneSeptember 30, 2017, we had no off-balance sheet arrangements, as defined under SEC rules, which have or are reasonably likely to have a material current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital investments, or capital resources.

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Commitments and Contingencies

See the footnote titled Commitments and Contingencies to the accompanying condensed consolidated financial statements included elsewhere in this report.



Recent Accounting Standards

See the footnote titled Summary of Significant Accounting Policies to the accompanying condensed consolidated financial statements included elsewhere in this report.

Recent Regulatory Developments

On May 2, 2017, in response to an incident in Firestone, Colorado, the Colorado Oil & Gas Conservation Commission (“COGCC”) issued a Notice to Operators (the “Notice”). Among other things, the Notice included requirements for all operators of oil and gas wells in Colorado to inspect all existing flowlines and pipelines located within 1,000 feet of a building unit; inspect any abandoned flowlines or pipelines, regardless of distance to ensure proper abandonment; and test integrity of all connected flowlines. Additional regulations or mandates from the COGCC or other regulators related to this matter are expected to arise.

We timely complied with both phases of the Notice. We have an existing Flowline Integrity Management Program to inspect all Denver-Julesburg Basin wells and related pipelines on an annual basis, and will continue to engage in this process.

On August 22, 2017, the State announced its response to the incident, following a three month review of oil and gas operations. The policy initiatives proposed could come either through rulemaking or legislation.

Critical Accounting Policies and Estimates

The preparation of the accompanying condensed consolidated financial statements in conformity with U.S. GAAP required management to use judgment in making estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of revenue and expenses.

There have been no significant changes to our critical accounting policies and estimates or in the underlying accounting assumptions and estimates used in these critical accounting policies from those disclosed in the condensed consolidated financial statements and accompanying notes contained in our 2016 Form 10-K filed with the SEC on February 28, 2017.

Reconciliation of Non-U.S. GAAP Financial Measures

We use "adjusted cash flows from operations," "adjusted net income (loss)" and "adjusted EBITDAX," non-U.S. GAAP financial measures, for internal management reporting, when evaluating period-to-period changes and, in some cases, providing public guidance on possible future results. Beginning in 2017, we have included non-cash stock-based compensation and exploration, geologic and geophysical expense toin our reconciliation of adjusted EBITDAX calculation.  In prior periods, we included adjusted EBITDA, a non-U.S. GAAP financial measure that did not include these adjustments.  We have elected to disclose Adjusted EBITDAX rather than Adjusted EBITDA in this report and other public disclosures because we believe it is more comparable to similar metrics presented by others in the industry. All prior periods have been conformed for comparability of this information. These measures are not measures of financial performance under U.S. GAAP and should be considered in addition to, not as a substitute for, net income (loss) or cash flows from operations, investing or financing activities, and should not be viewed as liquidity measures or indicators of cash flows reported in accordance with U.S. GAAP. The non-U.S. GAAP financial measures that we use may not be comparable to similarly titled measures reported by other companies. Also, in the future, we may disclose different non-U.S. GAAP financial measures in order to help our investors more meaningfully evaluate and compare our future results of operations to our previously reported results of operations. We strongly encourage investors to review our financial statements and publicly filed reports in their entirety and not rely on any single financial measure.

Adjusted cash flows from operations. We define adjusted cash flows from operations as the cash flows earned or incurred from operating activities, without regard to changes in operating assets and liabilities. We believe it is important to consider adjusted cash flows from operations, as well as cash flows from operations, as we believe it often provides more transparency into what drives the changes in our operating trends, such as production, prices, operating costs, and related operational factors, without regard to whether the related asset or liability was received or paid during the same period. We
PDC ENERGY, INC.

also use this measure because the timing of cash received from our assets, cash paid to obtain an asset or payment of our obligations has generally been a timing issue from one period to the next as we have not had significant accounts receivable collection problems, nor been unable to purchase assets or pay our obligations.

Adjusted net income (loss). We define adjusted net income (loss) as net income (loss), plus loss on commodity derivatives, less gain on commodity derivatives, and net settlements on commodity derivatives, each adjusted for tax effect. We believe it is important to consider adjusted net income (loss), as well as net income (loss). We believe this measure often provides more transparency into our operating trends, such as production, prices, operating costs, net settlements from
PDC ENERGY, INC.

derivatives, and related factors, without regard to changes in our net income (loss) from our mark-to-market adjustments resulting from net changes in the fair value of unsettled derivatives. Additionally, other items which are not indicative of future results may be excluded to clearly identify operating trends.

Adjusted EBITDAX. We define adjusted EBITDAX as net income (loss), plus loss on commodity derivatives, interest expense, net of interest income, income taxes, impairment of properties and equipment, exploration, geologic, and geophysical expense, depreciation, depletion and amortization expense, accretion of asset retirement obligations, and non-cash stock-based compensation, less gain on commodity derivatives and net settlements on commodity derivatives. Adjusted EBITDAX is not a measure of financial performance or liquidity under U.S. GAAP and should be considered in addition to, not as a substitute for, net income (loss), and should not be considered an indicator of cash flows reported in accordance with U.S. GAAP. Adjusted EBITDAX includes certain non-cash costs incurred by us and does not take into account changes in operating assets and liabilities. Other companies in our industry may calculate adjusted EBITDAX differently than we do, limiting its usefulness as a comparative measure. We believe adjusted EBITDAX is relevant because it is a measure of our operational and financial performance, as well as a measure of our liquidity, and is used by our management, investors, commercial banks, research analysts, and others to analyze such things as:

operating performance and return on capital as compared to our peers;
financial performance of our assets and our valuation without regard to financing methods, capital structure, or historical cost basis;
our ability to generate sufficient cash to service our debt obligations; and
the viability of acquisition opportunities and capital expenditure projects, including the related rate of return.

    

PDC ENERGY, INC.


The following table presents a reconciliation of each of our non-U.S. GAAP financial measures to its most comparable U.S. GAAP measure:

Three Months Ended June 30, Six Months Ended June 30,Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 20162017 2016 2017 2016
(in millions)(in millions)
Adjusted cash flows from operations:              
Net cash from operating activities$123.7
 $96.6
 263.2
 $197.8
$148.2
 $163.0
 411.4
 $360.8
Changes in assets and liabilities19.2
 16.0
 (6.6) 5.8
2.7
 (40.4) (3.9) (34.6)
Adjusted cash flows from operations$142.9
 $112.6
 $256.6
 $203.6
$150.9
 $122.6
 $407.5
 $326.2
              
Adjusted net income (loss):       
Net income (loss)$41.2
 $(95.5) $87.4
 $(167.0)
Adjusted net loss:       
Net loss$(292.5) $(23.3) $(205.1) $(190.3)
(Gain) loss on commodity derivative instruments(57.9) 92.8
 (138.6) 81.7
52.2
 (19.4) (86.5) 62.3
Net settlements on commodity derivative instruments12.0
 53.3
 12.5
 120.2
9.6
 47.7
 22.2
 167.9
Tax effect of above adjustments17.2
 (55.6) 47.2
 (76.8)(23.2) (10.8) 24.0
 (87.6)
Adjusted net income (loss)$12.5
 $(5.0) $8.5
 $(41.9)
Adjusted net loss$(253.9) $(5.8) $(245.4) $(47.7)
              
Net income (loss) to adjusted EBITDAX:       
Net income (loss)$41.2
 $(95.5) $87.4
 $(167.0)
Net loss to adjusted EBITDAX:       
Net loss$(292.5) $(23.3) $(205.1) $(190.3)
(Gain) loss on commodity derivative instruments(57.9) 92.8
 (138.6) 81.7
52.2
 (19.4) (86.5) 62.3
Net settlements on commodity derivative instruments12.0
 53.3
 12.5
 120.2
9.6
 47.7
 22.2
 167.9
Non-cash stock-based compensation5.4
 6.4
 9.8
 11.1
4.8
 4.1
 14.6
 15.2
Interest expense, net18.9
 10.5
 38.1
 20.8
18.8
 20.1
 56.9
 40.9
Income tax expense (benefit)24.5
 (58.3) 50.9
 (100.2)
Income tax benefit(122.4) (12.0) (71.5) (112.2)
Impairment of properties and equipment27.6
 4.2
 29.8
 5.2
252.7
 0.9
 282.5
 6.1
Impairment of goodwill75.1
 
 75.1
 
Exploration, geologic, and geophysical expense1.0
 0.2
 2.0
 0.4
41.9
 0.2
 43.9
 0.7
Depreciation, depletion, and amortization126.0
 107.0
 235.3
 204.4
125.2
 112.9
 360.6
 317.3
Accretion of asset retirement obligations1.7
 1.8
 3.4
 3.6
1.5
 1.8
 4.9
 5.4
Adjusted EBITDAX$200.4
 $122.4
 $330.6
 $180.2
$166.9
 $133.0
 $497.6
 $313.3
              
Cash from operating activities to adjusted EBITDAX:              
Net cash from operating activities$123.7
 $96.6
 $263.2
 $197.8
$148.2
 $163.0
 $411.4
 $360.8
Interest expense, net18.9
 10.5
 38.1
 20.8
18.8
 20.1
 56.9
 40.9
Amortization of debt discount and issuance costs(3.2) (1.3) (6.4) (3.1)(3.2) (9.9) (9.6) (13.0)
Gain (loss) on sale of properties and equipment0.5
 (0.3) 0.7
 (0.2)
Gain on sale of properties and equipment0.1
 0.2
 0.8
 
Exploration, geologic, and geophysical expense1.0
 0.2
 2.0
 0.4
41.9
 0.2
 43.9
 0.7
Exploratory dry hole costs(41.2) 
 (41.2) 
Other40.3
 0.7
 39.6
 (41.3)(0.4) (0.2) 39.3
 (41.5)
Changes in assets and liabilities19.2
 16.0
 (6.6) 5.8
2.7
 (40.4) (3.9) (34.6)
Adjusted EBITDAX$200.4
 $122.4
 $330.6
 $180.2
$166.9
 $133.0
 $497.6
 $313.3


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PDC ENERGY, INC.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market-Sensitive Instruments and Risk Management

We are exposed to market risks associated with interest rate risks, commodity price risk and credit risk. We have established risk management processes to monitor and manage these market risks.

Interest Rate Risk

Changes in interest rates affect the amount of interest we earn on our interest bearing cash, cash equivalents, and restricted cash accounts and the interest we pay on borrowings under our revolving credit facility. Our 2021 Convertible Notes, 2024 Senior Notes, and 2022 Senior Notes have fixed rates, and therefore near-term changes in interest rates do not expose us to risk of earnings or cash flow loss; however, near-term changes in interest rates may affect the fair value of our fixed-rate debt.

As of JuneSeptember 30, 2017, our interest-bearing deposit accounts included money market accounts, certificates of deposit, and checking and savings accounts with various banks. The amount of our interest-bearing cash, cash equivalents, and restricted cash as of JuneSeptember 30, 2017 was $201.5$105.6 million with a weighted-average interest rate of 0.91.0 percent. Based on a sensitivity analysis of our interest-bearing deposits as of JuneSeptember 30, 2017 and assuming we had $201.5$105.6 million outstanding throughout the period, we estimate that a one percent increase in interest rates would have increased interest income for the sixnine months ended JuneSeptember 30, 2017 by approximately $1.0$0.8 million.

As of JuneSeptember 30, 2017, we had no outstanding balance on our revolving credit facility.
    
Commodity Price Risk

We are exposed to the potential risk of loss from adverse changes in the market price of crude oil, natural gas, natural gas basis, and NGLs. Pursuant to established policies and procedures, we manage a portion of the risks associated with these market fluctuations using commodity derivative instruments. These instruments help us predict with greater certainty the effective crude oil, natural gas, natural gas basis, and propane prices we will receive for our hedged production. We believe that our commodity derivative policies and procedures are effective in achieving our risk management objectives.

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PDC ENERGY, INC.

The following table presents our commodity and basis derivative positions related to crude oil, natural gas, and propane in effect as of JuneSeptember 30, 2017:
 Collars Fixed-Price Swaps   Collars Fixed-Price Swaps  
Commodity/ Index/
Maturity Period
 
Quantity
(Gas -
BBtu
Oil - MBbls)
 
Weighted-Average
Contract Price
 
Quantity (Oil - MBbls
Gas and Basis-
BBtu
 Propane - MBbls)
 
Weighted-
Average
Contract
Price
 
Fair Value
June 30,
2017 (1)
(in millions)
 
Quantity
(Gas -
BBtu
Oil - MBbls)
 
Weighted-Average
Contract Price
 
Quantity (Oil - MBbls
Gas and Basis-
BBtu
 Propane - MBbls)
 
Weighted-
Average
Contract
Price
 
Fair Value
September 30,
2017 (1)
(in millions)
 Floors Ceilings   Floors Ceilings 
Crude Oil                        
NYMEX                        
2017 1,232.0
 $49.54
 $62.32
 3,680.1
 $50.13
 $18.3
 616.0
 $49.54
 $62.32
 1,837.1
 $50.13
 $(2.6)
2018 1,512.0
 41.85
 54.31
 6,472.0
 52.54
 26.5
 1,512.0
 41.85
 54.31
 7,972.0
 52.11
 (0.6)
2019 
 
 
 2,400.0
 50.25
 (1.8)
Total Crude Oil 2,744.0
     10,152.1
   $44.8
 2,128.0
     12,209.1
   $(5.0)
                        
Natural Gas                        
NYMEX                        
2017 5,900.2
 $3.38
 $4.02
 19,620.0
 $3.40
 $8.3
 2,895.1
 $3.38
 $4.02
 10,310.0
 $3.39
 $4.6
2018 5,230.0
 3.00
 3.54
 51,280.0
 2.95
 (1.1) 5,230.0
 3.00
 3.54
 51,280.0
 2.95
 (4.1)
Total Natural Gas 11,130.2
     70,900.0
   $7.2
 8,125.1
     61,590.0
   $0.5
                        
Basis Protection                        
CIG                        
2017 
 
 
 25,128.4
 $(0.33) $1.0
 
 
 
 13,264.2
 $(0.34) $0.6
2018 
 
 
 30,200.0
 (0.34) 2.7
 
 
 
 30,200.0
 (0.34) 3.7
Waha                        
2018 
 
 
 1,825.0
 (0.43) 
 
 
 
 6,000.0
 (0.50) 0.1
Total Basis Protection 
     57,153.4
   $3.7
 
     49,464.2
   $4.4
                        
Propane                        
Mont Belvieu                        
2017 
 
 
 642.9
 $26.29
 $0.3
 
 
 
 411.9
 $27.22
 $(4.3)
2018 
 
 
 428.6
 29.14
 (1.3)
Total Propane       840.5
   $(5.6)
Commodity Derivatives Fair ValueCommodity Derivatives Fair Value       $56.0
Commodity Derivatives Fair Value       $(5.7)
                        
____________

(1)
Approximately 15.010.8 percent of the fair value of our commodity derivative assets and 13.428.4 percent of the fair value of our commodity derivative liabilities were measured using significant unobservable inputs (Level 3).

    
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PDC ENERGY, INC.

In addition to our commodity derivative positions as of JuneSeptember 30, 2017, we entered into the following commodity derivative positions subsequent to JuneSeptember 30, 2017 that are effective as of AugustNovember 3, 2017:

 Fixed-Price Swaps Fixed-Price Swaps
Commodity/ Index/
Maturity Period
 
Quantity (Oil - MBbls
Gas and Basis-
BBtu
 Propane - MBbls)
 
Weighted-
Average
Contract
Price
 
Quantity (Oil - MBbls
Gas and Basis-
BBtu
 Propane - MBbls)
 
Weighted-
Average
Contract
Price
   
Crude Oil       
NYMEX       
2018 500.0
 $49.75
 600.0
 $53.30
2019 800.0

49.75
 600.0
 $51.43
    
Total Crude Oil 1,300.0
   1,200.0
  
       
Basis Protection       
Waha   
CIG    
2018 4,175.0
 $(0.53) 5,000.0
 $(0.51)
 
      
Propane   
Mont Belvieu   
2017 114.3
 $30.56
El Paso    
2018 285.7
 27.25
 3,000.0
 $(0.62)
Total Propane 400.0
  
    
Total Basis Swaps 8,000.0
  
    
Rollfactor (1)    
2018 3,648.0
 $0.03

(1)These positions hedge the timing risk associated with our physical sales. We generally sell crude oil for the delivery month at a sales price based on the average NYMEX West Texas Intermediate price during that month, plus an adjustment calculated as a spread between the weighted average prices of the delivery month, the next month and the following month during the period when the delivery month is the first month (the "trade month roll").

Our realized prices vary regionally based on local market differentials and our transportation agreements. The following table presents average market index prices for crude oil and natural gas for the periods identified, as well as the average sales prices we realized for our crude oil, natural gas, and NGLs production:

Three Months Ended Six Months Ended Year EndedThree Months Ended Nine Months Ended Year Ended
June 30, 2017 June 30, 2017 December 31, 2016September 30, 2017 September 30, 2017 December 31, 2016
Average NYMEX Index Price:          
Crude oil (per Bbl)$48.28
 $50.10
 $43.32
$48.20
 $49.47
 $43.32
Natural gas (per MMBtu)3.18
 3.25
 2.46
3.00
 3.17
 2.46
          
Average Sales Price Realized:          
Excluding net settlements on commodity derivativesExcluding net settlements on commodity derivatives    Excluding net settlements on commodity derivatives    
Crude oil (per Bbl)$45.97
 $47.31
 $39.96
$45.66
 $46.69
 $39.96
Natural gas (per Mcf)2.16
 2.26
 1.77
2.17
 2.23
 1.77
NGLs (per Bbl)14.59
 16.75
 11.80
18.11
 17.24
 11.80

Based on a sensitivity analysis as of JuneSeptember 30, 2017, we estimate that a ten percent increase in natural gas, crude oil, and the propane portion of NGLs prices, inclusive of basis, over the entire period for which we have commodity derivatives
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PDC ENERGY, INC.

in place, would have resulted in a decrease in the fair value of our derivative positions of $74.8$83.9 million, whereas a ten percent decrease in prices would have resulted in an increase in fair value of $74.2$83.7 million.

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PDC ENERGY, INC.

Credit Risk

Credit risk represents the loss that we would incur if a counterparty fails to perform its contractual obligations. We attempt to reduce credit risk by diversifying our counterparty exposure and entering into transactions with high-quality counterparties. When exposed to significant credit risk, we analyze the counterparty’s financial condition prior to entering into an agreement, establish credit limits and monitor the appropriateness of those limits on an ongoing basis. We monitor the creditworthiness of significant counterparties through our credit committee, which utilizes a number of qualitative and quantitative tools to assess credit risk and takes mitigative actions if deemed necessary. While we believe that our credit risk analysis and monitoring procedures are reasonable, no amount of analysis can assure performance by our counterparties.

Our oil and gas exploration and production business's crude oil, natural gas, and NGLs sales are concentrated with a few predominately large customers. This concentrates our credit risk exposure with a small number of large customers.

Amounts due to our gas marketing business are from a diverse group of entities, including major upstream and midstream energy companies, financial institutions, and end-users in various industries. The underlying operations of these entities are geographically concentrated in the same region, which increases the credit risk associated with this business. As natural gas prices continue to remain depressed, certain third-party producers relating to our gas marketing business continue to experience financial distress, which has led to certain contractual defaults and litigation; however, to date, we have had no material counterparty default losses. We have initiated several legal actions for breach of contract, collection and related claims against certain third-party producers that are delinquent in their payment obligations, which have to date resulted in two default judgments. We expect this trend to continue for this business.

We primarily use financial institutions which are lenders in our revolving credit facility as counterparties for our derivative financial instruments. Disruption in the credit markets, changes in commodity prices and other factors may have a significant adverse impact on a number of financial institutions. To date, we have had no material counterparty default losses from our commodity derivative financial instruments. See the footnote titled Commodity Derivative Financial Instruments to our condensed consolidated financial statements included elsewhere in this report for more detail on our commodity derivative financial instruments.

Disclosure of Limitations

Because the information above included only those exposures that existed at JuneSeptember 30, 2017, it does not consider those exposures or positions which could arise after that date. As a result, our ultimate realized gain or loss with respect to interest rate and commodity price fluctuations will depend on the exposures that arise during the period, our commodity price risk management strategies at the time, and interest rates and commodity prices at the time.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As of JuneSeptember 30, 2017, we carried out an evaluation under the supervision and with the participation of management, including the Chief Executive Officer and the PrincipalChief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e).

Based on the results of this evaluation, the Chief Executive Officer and the PrincipalChief Financial Officer concluded that our disclosure controls and procedures were effective as of JuneSeptember 30, 2017.

Changes in Internal Control over Financial Reporting

During the three months ended JuneSeptember 30, 2017, we made no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

PART II
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ITEM 1. LEGAL PROCEEDINGS

From time to time, we are a party to various legal proceedings in the ordinary course of business. We are not currently a party to any litigation that we believe would have a materially adverse effect on our business, financial condition, results of operations, or liquidity.

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 JuneSeptember 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. Accrued environmental liabilities are recorded in other accrued expenses on the condensed consolidated balance sheets.

Clean Air Act Tentative Agreement and Related Consent Decree

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.Colorado ("DJ Basin"). The Information Request focusesfocused on historical operation and design information for 46 of our production facilities and asks that we conductrequested 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
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on the above matters. We continuecontinued to scheduleconduct meetings with these agencies in working toward a resolution of the matters. On September 28, 2017, the parties jointly filed for an extension of time for PDC to reply to the complaint. The ultimateextension was requested because the parties reached an agreement to resolve the case subject to final approval by the appropriate persons within the federal government and state government, as well as outcome relatedof the period of public comment on the proposed decree.

A consent decree was signed by all parties on October 31, 2017 and is subject to these combined actions isa 30-day comment period in which it will be publicly published in the Federal Register. The consent decree provides that we will implement changes to our design, operation, and maintenance of most of our field-wide storage tank systems to enhance our emission management in the DJ Basin.  Agreed upon and planned efforts include, but are not known atlimited to, vapor control system modifications and verification, increased inspection and monitoring, and installation of tank pressure monitors. We voluntarily included in the consent decree approximately 40 additional facilities associated with our pending acquisition of additional assets in the basin.  The three primary elements of the consent decree are: (i) fine/supplemental environmental projects ($1.5 million cash fine, plus $1 million in supplemental environmental projects); (ii) injunctive relief with an estimated cost of approximately $18 million, primarily representing capital enhancements to our operations; and (iii) mitigation with an estimated cost of $1.7 million.  Certain expenditures for the injunctive relief are believed to have been incurred in 2016 and 2017, with the remainder expected to be incurred over the next few years. We do not believe that the expenditures resulting from the settlement will have a material adverse effect on our consolidated financial statements. Although we believe the consent decree will be approved by the court following the comment period, this time.cannot be guaranteed. 

Action Regarding Firm Transportation Contracts
    
In June 2016, a group of 42 independent West Virginia natural gas producers filed a lawsuit in Marshall County, West Virginia, naming Dominion Transmission, Inc. ("Dominion"), certain entities affiliated with Dominion, and our
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subsidiary RNG as defendants, alleging various contractual, fiduciary and related claims against the defendants, all of which are associated with firm transportation contracts entered into by plaintiffs and relating to pipelines owned and operated by Dominion and its affiliates. The case has been transferred to the Business Court Division of the Circuit Court of Marshall County, West Virginia, and the parties are awaiting that court's ruling on previously-filed pre-trial pleadings. RNG is unable to estimate any potential damages associated with the claims, but believes the complaint is without merit and intends to vigorously pursue its defenses.


ITEM 1A. RISK FACTORS

We face many risks. Factors that could materially adversely affect our business, financial condition, operating results, or liquidity and the trading price of our common stock are described under Item 1A, Risk Factors, of our 2016 Form 10-K. This information should be considered carefully, together with other information in this report and other reports and materials we file with the SEC.

There have been no material changes from the risk factors previously disclosed in our 2016 Form 10-K.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    
Purchases of Equity Securities by the Issuer and Affiliated Purchasers

Period Total Number of Shares Purchased (1) Average Price Paid per Share
     
April 1 - 30, 2017 52,518
 $62.35
May 1 - 31, 2017 
 
June 1 - 30, 2017 
 
Total second quarter 2017 purchases 52,518
 $62.35
     
Period Total Number of Shares Purchased (1) Average Price Paid per Share
     
July 1 - 31, 2017 1,360
 $42.68
August 1 - 31, 2017 
 
September 1 - 30, 2017 12
 39.58
Total third quarter 2017 purchases 1,372
 $42.65
     
__________
(1)Purchases primarily represent shares purchased from employees for the payment of their tax liabilities related to the vesting of securities issued pursuant to our stock-based compensation plans.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None.

ITEM 4. MINE SAFETY DISCLOSURES - Not applicable.

ITEM 5. OTHER INFORMATION - None.

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PDC ENERGY, INC.

ITEM 6. EXHIBITS

    Incorporated by Reference  
Exhibit Number  Exhibit Description Form  SEC File Number  Exhibit Filing Date  Filed Herewith
             
10.1

X
31.1          X
             
31.2          X
             
32.1*           
             
101.INS XBRL Instance Document         X
             
101.SCH XBRL Taxonomy Extension Schema Document         X
             
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document         X
             
101.DEF XBRL Taxonomy Extension Definition Linkbase Document         X
             
101.LAB XBRL Taxonomy Extension Label Linkbase Document         X
             
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document         X
             
* Furnished herewith.
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PDC ENERGY, INC.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 PDC Energy, Inc.
 (Registrant)
  
  
  
  
Date: August 8,November 6, 2017/s/ Barton R. Brookman
 Barton R. Brookman
 President and Chief Executive Officer
 (principal executive officer)
  
 /s/ David W. Honeyfield
 David W. Honeyfield
 Senior Vice President and Chief Financial Officer
 (principal financial officer)
  
  
  
  
  

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