COMMITMENTS AND CONTINGENCIES

Utica Shale Leasehold Agreements. During the third quarter of 2011, we entered into a series of leasehold agreements with multiple parties for the option to acquire acreage targeting the wet natural gas and crude oil phases of the Utica Shale play throughout southeastern Ohio. Pursuant to the agreements, we have the right, after confirmation of title, to acquire an estimated 30,000 net acres in the prospective Utica Shale play. Should we confirm title on all 30,000 acres, we estimate that the purchase price of these leaseholds will approximate $50 million. Further, during the fourth quarter of 2011, we entered into additional leasehold agreements giving us the opportunity to purchase an estimated additional 10,000 acres, subject to confirmation of title, for up to $20 million.

Drilling Rig Contracts. We enter into long-term contracts to secure the services of drilling rigs. As of December 31, 2011, we had outstanding commitments of $17.9 million, which included a $13.9 million commitment for a rig in the Permian Basin. Our Permian Basin Assets were subject to a purchase and sale agreement as of December 31, 2011. On February 28, 2012, the purchase and sale agreement was closed upon and, thereby, resulted in the assignment of our $13.9 million commitment to the purchaser of our Permian Basin assets. See Note 18.

Firm Transportation Agreements. We enter 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 PDCM and affiliated partnerships. We record in our financial statements only our share of costs based upon our working interest in the wells; however, with the exception of contracts entered into by PDCM, the costs of all volume shortfalls will be borne by PDC.

As of December 31, 2010, we had 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 whereby the accrued liability was relieved; consequently, during the third quarter of 2011, the accrued liability was eliminated with a corresponding reduction in the statement of operations line item production costs. The amendment did not extend the expiration date of the original agreement. The table below includes the impact of this amendment.

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.



	Year Ending December 31,
Area	2012		2013		2014		2015		2016 Through Expiration		Total		Expiration Date

Volume (MMcf)
Piceance	18,000		30,760		36,168		30,603		111,948		227,479		May 31, 2021
Appalachian Basin (1)	12,016		20,117		21,955		23,361		190,108		267,557		August 31, 2022
NECO	3,650		1,825		1,825		1,825		1,825		10,950		December 31, 2016
Total	33,666		52,702		59,948		55,789		303,881		505,986

Dollar commitment (in thousands)	$	15,318	$	25,597	$	28,805	$	26,164	$	127,353	$	223,237

_____________

(1)

Includes a precedent agreement that becomes effective when a planned pipeline is placed in service, currently expected to be September 2012 and represents 3,917 MMcf of the total MMcf presented for the year ending December 31, 2012, 10,992 MMcf for each of the years ending December 31, 2013 through 2015, respectively, and 73,028 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 8.

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.

Alleged Class Action Filed Regarding 2010 and 2011 Partnership Purchases

On December 21, 2011 the Company and its wholly-owned merger subsidiary were served with an alleged class action on behalf of certain former partnership unit holders, related to 11 partnership repurchases completed by mergers in 2010 and 2011. The action was filed in United States ("U.S.") District Court for the Central District of California, and is titled Schulein v. Petroleum Development Corp. The Company was managing general partner for each of these partnerships and the mergers were each approved by a majority of the partnership units held by non-affiliated investor partners. The complaint alleges a claim that the proxy statements issued in connection with the mergers were inadequate, and a state law breach of fiduciary duty claim. On February 10, 2012, the Company filed a motion to dismiss. We believe the suit is without merit and we intend to defend vigorously.

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, subject to court approval, a written settlement agreement was signed confirming these terms. On June 30, 2011, the state court granted initial approval of the settlement agreement, subject to notice to class members and final court approval. Initial notice was then sent to the class members. The date for objection by class members was October 24, 2011, with no objections received. Final approval of the settlement was received in January 2012. As of December 31, 2011, the total settlement amount was included in other accrued expenses on the balance sheet with the related escrow account included in restricted cash - current on the balance sheet.

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 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 damages resulting from past events are probable and the costs can be reasonably estimated. As of December 31, 2011, and December 31, 2010, we had accrued environmental liabilities in the amount of $2.5 million and $1.7 million, respectively, included in other accrued expenses on the balance sheet. We are not aware of any environmental claims existing as of December 31, 2011, 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 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 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 December 31, 2011, the maximum annual repurchase obligation for 2012, based upon the minimum price described above, was approximately $6.3 million. We believe we have adequate liquidity to meet this obligation. During 2011, 2010 and 2009, we paid $0.2 million, $0.6 million and $1.7 million, respectively, under this provision for the repurchase of partnership units.

Lease Agreements. We entered into operating leases principally for the leasing of natural gas compressors, office space in Denver and Bridgeport, and general office equipment. The following table presents the minimum future lease payments under the non-cancelable operating leases as of December 31, 2011.



	Year Ending December 31,
	2012		2013		2014		2015		2016		Thereafter		Total
	(in thousands)

Minimum Lease Payments	$	2,575	$	2,500	$	2,286	$	1,867	$	402	$	1,138	$	10,768

Operating lease expense for the years ended December 31, 2011, 2010 and 2009, was $5.9 million, $4.9 million and $4.3 million, respectively.

Employment Agreements with Executive Officers. 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.

If, within two years following a change in 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, 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. Mr. Trimble became President and Chief Executive Officer in June 2011 and under his employment agreement, if he is terminated without cause, he is to receive payment of salary and bonus through June 30, 2013, provided such amount will equal at least one year's salary and bonus. 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 IRC Section 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 payment 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 Section 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 16 for a discussion related to the separation agreement entered into with our former chief executive officer in 2011.