NATURE OF OPERATIONS AND BASIS OF PRESENTATION

Petroleum Development Corporation ("PDC," "PDC Energy," "we," "us" or "the Company") is a domestic independent natural gas and crude oil company engaged in the exploration for and the acquisition, development, production and marketing of natural gas, natural gas liquids ("NGLs") and crude oil. As of December 31, 2011, we owned an interest in approximately 6,500 gross wells located primarily in the Appalachian Basin, Wattenberg Field, northeast Colorado and Piceance Basin. We are engaged in two business segments: (1) Oil and Gas Exploration and Production and (2) Gas Marketing.

The consolidated financial statements include the accounts of PDC, our wholly owned subsidiaries, an entity in which we have a controlling financial interest and our proportionate share of PDC Mountaineer, LLC ("PDCM") and 21 of our affiliated partnerships. Pursuant to the proportionate consolidation method, our accompanying 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.

On January 1, 2010, pursuant to the adoption of new accounting changes related to variable interest entities ("VIE"), PDCM, a VIE, was deconsolidated from 100% and proportionately consolidated at 67.4%, representing only our ownership interest. Through a series of capital contributions by our investing partner, our ownership interest in PDCM decreased to 50% as of September 30, 2011. Each change in our ownership interest resulted in a decrease in our proportionate share of net assets and any future earnings. As of September 30, 2011, we concluded that PDCM was no longer a VIE because our voting rights had become proportionately equal to our economic interests and the activities of the entity were being conducted equally for the benefit of both investing partners. The status change of PDCM to a non-VIE subject to the voting interest model did not have an impact on our financial statements, as we continue to proportionately consolidate PDCM.

The following table presents a detailed summary of the capital contributions made by our investing partner and our resulting ownership interest.



Date of Contribution	Investing Partner Contribution		PDC's Ownership Interest in PDCM
	(in thousands)

April 1, 2010	$	28,000	57.8%
November 1, 2010	7,000		55.8%
January 1, 2011	7,000		53.9%
March 1, 2011	5,000		52.7%
September 23, 2011	11,500		50.0%

The preparation of our consolidated financial statements in accordance with generally accepted accounting principles in the United States of America ("U.S. GAAP") requires us to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Estimates which are particularly significant to our consolidated financial statements include estimates of natural gas, NGL and crude oil sales revenue, natural gas, NGL and crude oil reserves, future cash flows from natural gas and crude oil properties, valuation of derivative instruments and valuation of deferred income tax assets.

Certain reclassifications have been made to prior period financial statements to conform to the current year presentation. The reclassifications are mainly related to our discontinued operations. See Note 13 for additional information regarding our discontinued operations. We also reclassified (1) impairment and amortization charges recorded for unproved properties out of the statement of operations' line item exploration expense and into impairment of natural gas and crude oil properties, and (2) the derivatives fair value hierarchy level of our NYMEX-based natural gas fixed-price swaps from Level 1 to Level 2 and, our PEPL and CIG-based natural gas fixed-price swaps, crude oil fixed-price swaps, basis swaps and natural gas physical purchases from Level 3 to Level 2. These reclassifications had no impact on previously reported cash flows, net income, earnings per share or shareholders' equity.