COMMITMENTS AND CONTINGENCIES

Merger Agreements. On June 20, 2011, pursuant to our previously announced partnership acquisition plan, we entered into separate merger agreements with five of our affiliated partnerships: PDC 2003-A Limited Partnership, PDC 2003-B Limited Partnership, PDC 2003-C Limited Partnership, PDC 2003-D Limited Partnership and PDC 2002-D Limited Partnership (collectively, the "2003/2002-D Partnerships"). We serve as the managing general partner of each of the 2003/2002-D Partnerships. Pursuant to each merger agreement, if the merger is approved by the holders of a majority of the limited partnership units held by limited partners of that partnership not owned by us (the "non-affiliated investor partners"), as well as the satisfaction of other customary closing conditions, then we will acquire such partnerships. If all five partnerships are acquired, we expect to pay an aggregate of approximately $29.5 million to the non-affiliated investor partners for the limited partnership units of these partnerships. On June 23, 2011, we filed the preliminary proxy statements with the SEC and anticipate, upon clearance by the SEC, that the definitive proxy statements are anticipated to be mailed to investors in August 2011. If the required approvals are received, we expect the mergers to be completed in the fourth quarter of 2011. We expect to finance the acquisition of the 2003/2002-D Partnerships by borrowing funds under our revolving credit facility. There can be no assurance that we will be successful in the acquisition of the 2003/2002-D Partnerships, individually or collectively, or on terms acceptable to us.

Drilling Rig Contract. In order to secure the services of a drilling rig, in August 2010, PDCM entered into a commitment with a drilling contractor for the services of a drilling rig. The commitment expires in October 2012. During the first quarter of 2011, included in production costs in the statement of operations, we recorded a charge of $0.5 million related to our proportionate share of rig laydown costs. As of June 30, 2011, our proportionate share of PDCM's related maximum commitment through October 2012 was $4.5 million.

Firm Transportation Agreements. We have entered into contracts that provide firm transportation, sales and processing charges on pipeline systems through which we transport or sell our natural gas and the natural gas of working interest owners, PDCM, our affiliated partnerships and other third parties. These contracts require us to pay these transportation and processing charges whether the required volumes are delivered or not. Satisfaction of the volume requirements includes volumes produced by us, volumes purchased from third parties and volumes produced by our joint venture and affiliated partnerships. We record in our financial statements only our share of costs based upon our working interest in the wells; however, the costs of all volume shortfalls will be borne by PDC.

As of June 30, 2011, we have a liability in the amount of $3.1 million included in other liabilities on the balance sheet related to an agreement in the Piceance Basin. On July 27, 2011, we entered into an amendment with the unrelated third party subject to this agreement and as a result, the accrued liability as of June 30, 2011, will be reduced during the third quarter of 2011 with no cash payment by us required. The amendment did not extend the expiration date of the original agreement. The table below does not include the impact of this amendment. Including the impact of this amendment, our volume requirements for the Piceance Basin would be 18,000 MMcf, 19,814 MMcf, 39,252 MMcf, 33,201 MMcf and 126,265 MMcf for the 12 months ending June 30, 2012, 2013, 2014, 2015 and 2016 through expiration, respectively, for a total of 236,532 MMcf.

The following table presents gross volume information, including our proportionate share of PDCM, related to our long-term firm sales, processing and transportation agreements for pipeline capacity.



	For the Twelve Months Ending June 30,
Area	2012		2013		2014		2015		2016 Through Expiration		Total		Expiration Date

Volume (MMcf)
Piceance Basin	32,613		32,577		28,182		22,131		60,759		176,262		May 31, 2021
Appalachian Basin (1)	5,150		14,324		15,992		15,992		110,665		162,123		August 31, 2022
NECO	2,745		1,825		1,825		1,825		2,745		10,965		December 31, 2016
Total	40,508		48,726		45,999		39,948		174,169		349,350

Dollar commitment (in thousands)	$	19,867	$	24,118	$	22,704	$	19,527	$	82,171	$	168,387

_____________

(1)

Includes a precedent agreement that becomes effective when a planned pipeline is placed in service, currently expected to be September 2012 and represents 8,823 MMcf of the total MMcf presented for the year ending June 30, 2013, 10,629 MMcf for each of the years ending June 30, 2014 and 2015, respectively, and 76,265 MMcf thereafter. This agreement will be null and void if the pipeline is not completed. In August 2009, we issued a letter of credit related to this agreement, see Note 7.

Litigation. The Company is involved in various legal proceedings that it considers normal to its business. 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. There are no assurances that settlements can be reached on acceptable terms or that adverse judgments, if any, in the remaining litigation will not exceed the amounts reserved. Although the results cannot be known with certainty, we currently believe that the ultimate results of such proceedings will not have a material adverse effect on our financial position, results of operations or liquidity.

Royalty Owner Class Action

Gobel et al v. Petroleum Development Corporation, filed on January 27, 2009, in Circuit Court of Harrison County, CA No. 09-C-40-2

David W. Gobel, individually and allegedly as representative of all royalty owners in the Company's West Virginia oil and gas wells, filed a lawsuit against the Company alleging that we failed to properly pay royalties. The allegations stated that the Company improperly deducted certain charges and costs before applying the royalty percentage. Punitive damages were requested in addition to breach of contract, tort and fraud allegations. On October 27, 2010, the state court set a trial date of April 2012.

In April 2011, the Company entered into an oral settlement agreement with respect to this lawsuit, settling all claims between the parties for an aggregate payment of $8.7 million. On June 15, 2011, a written settlement agreement was signed confirming these terms and on June 30, 2011, the state court granted initial approval of the settlement agreement, subject to notice to class members and final court approval. As of June 30, 2011, the total settlement amount of $8.7 million was accrued and included in other accrued expenses on the accompanying balance sheet. A related escrow account was fully funded on July 22, 2011.

Environmental. Due to the nature of the natural gas and oil industry, we are exposed to environmental risks. We have various policies and procedures in place to avoid environmental contamination and mitigate the risks from environmental contamination. We conduct periodic reviews to identify changes in our environmental risk profile. Liabilities are accrued when environmental assessments and/or clean-ups are probable and the costs can be reasonably estimated. As of June 30, 2011, and December 31, 2010, we had accrued environmental liabilities in the amount of $2.3 million and $1.7 million, respectively, included in other accrued expenses on the balance sheet. We are not currently aware of any environmental claims existing as of June 30, 2011, which have not been provided for or would otherwise have a material impact on our accompanying financial statements. However, there can be no assurance that current regulatory requirements will not change or unknown past non-compliance with environmental laws will not be discovered on our properties.

Partnership Repurchase Provision. Substantially all of our drilling programs contain a repurchase provision where investing partners may request that we purchase their partnership units at any time beginning with the third anniversary of the respective partnership's first cash distribution. The provision provides that we are obligated to purchase an aggregate of 10% of the initial subscriptions per calendar year (at a minimum price of four times the most recent 12 months' cash distributions from production), if repurchase is requested by investors, subject to our financial ability to do so. As of June 30, 2011, the maximum annual repurchase obligation, based upon the minimum price described above, was approximately $5 million. We believe we have adequate liquidity to meet this obligation. For the six months ended 2011, amounts paid for the repurchase of partnership units pursuant to this provision were immaterial.

Employment Agreements with Executive Officers. With the exception of our Chief Executive Officer, we have employment agreements with our executive officers. The employment agreements provide for annual base salaries, eligibility for performance bonus compensation and other various benefits, including severance benefits. We are currently in the process of preparing an employment agreement with our Chief Executive Officer.

If, within two years following a change of control of the Company ("change in control period"), either the Company terminates the executive officer without cause or the executive officer terminates employment for good reason (what is referred to as a "double trigger"), then the severance benefits owed equals three times the sum of the executive's highest annual base salary during the previous two years of employment immediately preceding the termination date and the executive's highest annual bonus paid or, in the case of one executive officer, paid or payable during the same two-year period. For one executive, in this calculation, the target bonus will be used as the minimum value for the first two years of employment. Where the Company terminates the executive officer without cause or the executive officer terminates employment for good reason outside of the change in control period, the severance benefits range from two times to three times, specific to the executive officer, the benefits noted above. For this purpose, a change of control and good reason correspond to the respective definitions of change of control and good reason under Internal Revenue Code ("IRC") 409A and the supporting Treasury regulations, with some differences. Under any of the above circumstances, the executive officer is also entitled under his employment agreement to (i) vesting of any unvested equity compensation (excluding all long-term incentive shares), (ii) reimbursement for any unpaid expenses, (iii) retirement benefits earned under the current and/or previous agreements, (iv) continued coverage under our medical plan at the Company's cost for the federal COBRA health continuation coverage period and (v) payment of any earned and unpaid bonus amounts. In addition, the executive officer is entitled to receive any benefits that he would have otherwise been entitled to receive under our qualified retirement plan, although those benefits are not increased or accelerated.

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

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

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

See Note 13 for a discussion related to the separation agreement entered into with our former chief executive officer during the three months ended 2011.

Partnership Casualty Losses. As Managing General Partner of numerous partnerships, we have a potential liability for casualty losses in excess of the partnership assets and insurance. We believe the casualty insurance coverage that we and our subcontractors carry is adequate to meet this potential liability.