UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

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Petroleum Development Corporation

(doing business as PDC Energy) (Name of Registrant as Specified in Its Charter)

(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)

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PETROLEUM DEVELOPMENT CORPORATION
(dba PDC Energy)

 

1775 Sherman Street, Suite 3000
Denver, Colorado 80203

 

April 25, 2011

 

Dear Stockholder of Petroleum Development Corporation (dba PDC Energy):

 

You are cordially invited to the Petroleum Development Corporation (dba PDC Energy) Annual Meeting of Stockholders to be held at the Denver Financial Center, Lobby Conference Room, 1775 Sherman Street, Denver, Colorado 80203, on June 10, 2011, at 11:00 a.m. Mountain Time.

 

The Notice of Annual Meeting and Proxy Statement, which are attached, provide information concerning the matters to be considered at the Annual Meeting. The Annual Meeting will cover the business contained in the Proxy Statement, including the election of three directors to our Board of Directors. I encourage you to read the enclosed Notice of Annual Meeting and Proxy Statement, which contains information about the Board of Directors and its committees and personal information about each of the nominees for the Board. The Proxy Statement provides information concerning our compensation of executive officers and includes a proposal for an advisory vote on executive compensation, as well as a proposal for an advisory vote on the frequency of future advisory votes on executive compensation. The Proxy Statement also includes a proposal to ratify the appointment of our independent registered public accounting firm, PricewaterhouseCoopers LLP.

 

We hope you can join us on June 10, 2011. Whether or not you can attend personally, it is important that your shares are represented at the meeting. We value your opinions and encourage you to participate in this year’s Annual Meeting by voting your proxy. You may vote by following the instructions on the proxy card. You may also attend in person and vote at the Annual Meeting.

 

Sincerely,

 

Daniel W. Amidon,
Corporate Secretary

 

PETROLEUM DEVELOPMENT CORPORATION
(dba PDC Energy)

1775 Sherman Street, Suite 3000
Denver, Colorado 80203

 

 

 

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To Be Held June 10, 2011

 

 

 

 

Denver Financial Center
Lobby Conference Room
1775 Sherman Street
Denver, Colorado 80203

 

To the Stockholders of Petroleum Development Corporation (dba PDC Energy):

 

Notice is hereby given that the Annual Meeting of Stockholders of Petroleum Development Corporation (dba PDC Energy) (“PDC,” “PDC Energy” or the “Company”) will be held at the Denver Financial Center, Lobby Conference Room, 1775 Sherman Street, Denver, Colorado 80203, on June 10, 2011, at 11:00 a.m. Mountain Time, for the following purposes, all as more fully described in the accompanying Proxy Statement:

 

(1) To elect the three Class I Director Nominees identified in the accompanying Proxy Statement for a three-year term until the 2014 Annual Meeting of Stockholders and until their successors are elected;

 

(2) To conduct an advisory vote on the compensation of the Company’s Named Executive Officers;

 

(3) To conduct an advisory vote on the frequency (every one, two or three years) of future advisory votes on the compensation of the Company’s Named Executive Officers;

 

(4) To ratify the selection of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2011; and

 

(5) To consider such other business as may properly come before the meeting and at any and all adjournments or postponements thereof.

 

The Board of Directors has fixed the close of business on April 15, 2011, as the record date for determining the stockholders having the right to receive notice of, to attend and to vote at the Annual Meeting or any adjournment or postponement thereof. The presence in person or by proxy of the holders of a majority of the outstanding shares of the Company’s common stock entitled to vote is required to constitute a quorum.

 

Each stockholder is cordially invited to attend and to vote at this meeting in person. Stockholders who do not expect to attend are requested to sign and date the accompanying proxy card and return it promptly in the enclosed postpaid envelope.

 

By Order of the Board of Directors,

 

Daniel W. Amidon,
Corporate Secretary

 

Denver, Colorado

April 25, 2011

 

PETROLEUM DEVELOPMENT CORPORATION
(dba PDC Energy)

1775 Sherman Street, Suite 3000

Denver, Colorado 80203

 

 

PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS

To Be Held June 10, 2011

 

 

Denver Financial Center
Lobby Conference Room
1775 Sherman Street
Denver, Colorado 80203

 

The accompanying proxy is solicited by the Board of Directors (“Board”) of Petroleum Development Corporation (dba PDC Energy) (“PDC,” “PDC Energy” or the “Company”) for use at the Annual Meeting of Stockholders of the Company to be held on June 10, 2011, at 11:00 a.m. Mountain Time, and at any and all adjournments or postponements of the meeting, for the purposes set forth in this Proxy Statement and the attached Notice of Annual Meeting of Stockholders. This Proxy Statement and the enclosed form of proxy are first being mailed to the stockholders of the Company on or about April 25, 2011.

 

The Company will bear the cost related to the solicitation of proxies. The Company will reimburse brokerage firms and other custodians, nominees and fiduciaries for reasonable and appropriate expenses incurred by them in sending proxy materials to the beneficial owners of the Company’s common stock. In addition to solicitations by mail, Directors, officers and employees of the Company may solicit proxies by telephone and, to the extent necessary, other electronic communication and personal interviews without additional compensation. The Company entered into an agreement with Georgeson Inc. as its proxy solicitor and anticipates paying costs of approximately $10,000 for such services.

 

TABLE OF CONTENTS

 

 

Stockholders of PDC, as recorded in the Company’s stock register on April 15, 2011, may vote at the meeting. The outstanding voting securities of the Company, as of April 15, 2011, consisted of 23,475,673 shares of common stock. Each share of common stock is entitled to one vote on each matter considered at the meeting.

 

The Board is asking for your proxy. Giving the Board your proxy means that you authorize the Board to vote your shares at the meeting in the manner you direct. We will vote your shares as you direct. You may vote for any or all Class I Director Nominees, or you may withhold your vote from any or all of the Director Nominees. Except regarding the vote on frequency, as set forth in the next sentence, you may also vote for or against the other proposals, or abstain from voting. With respect to the vote as to how frequently the stockholders should consider and vote upon our Named Executive Officers (as hereinafter defined) compensation, stockholders may vote for a frequency of vote of every one, two or three years, or stockholders may abstain from voting. Cumulative voting is not permitted by the Company’s By-Laws in the election of Directors.

 

If your shares are held in your name, you can vote by completing, signing and dating your proxy card and returning it in the enclosed envelope. If you give the Board your signed proxy but do not specify how to vote, your shares will be voted (1) in favor of the Class I Director Nominees named on the proxy: (2) in favor of approving the Company’s compensation of its Named Executive Officers; (3) in favor of the Company’s recommendation that the stockholders consider and vote upon the Company’s compensation of its Named Executive Officers once every three years; and (4) in favor of the ratification of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2011.

 

If you hold shares through someone else, such as a stockbroker, you will receive material from that firm asking how you want to vote. Check the voting form used by that firm to determine what procedures you must follow in order for you to vote your shares.

 

If you are a participant in PDC’s 401(k) and Profit Sharing Plan and have shares of PDC common stock credited to your plan account as of the record date, such shares are shown on the enclosed proxy card and you have the right to direct the plan trustee regarding how to vote those shares. The trustee will vote the shares in your plan account in accordance with your instructions. Your vote may not be counted if your proxy card is not received by June 7, 2011, or if you have not sent instructions by such date as provided above under “How Proxies Work.” You cannot vote such shares at the Annual Meeting or change your vote.

 

You may revoke your proxy before it is voted by:

 

 

If you hold your shares through someone else, such as a stockbroker, you will need to follow the directions they give you to revoke a proxy or otherwise vote at the meeting.

 

In order to carry on the business of the meeting, there must be a quorum. This means that at least a majority of the outstanding shares eligible to vote must be represented at the meeting, either by proxy or in person. Treasury shares, which are shares owned by PDC itself, are not voted and do not count for this purpose.

 

The following table presents the voting requirements to elect the three Class I Director Nominees and approve the other proposals presented in this Proxy Statement. Brokers, banks or other holders of record will have discretionary authority only with respect to the ratification of the Audit Committee’s selection of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm for 2011.

 

PROPOSAL SUMMARY

 

 

The Class I Director Nominees who receive the most votes will be elected to fill the available seats on the Board. There is no provision in the Company’s By-Laws which requires Director Nominees to receive a majority of the votes cast to be elected. Only votes for or against a proposal count, except with respect to Proposal No. 3. Abstentions and broker non-votes will count for auditor ratification (Proposal No. 4) and for quorum purposes, but not for other voting purposes. Broker non-votes occur when a broker returns a proxy but does not have authority from the owner of the stock to vote on a particular proposal.

 

Only stockholders or their proxy holders and PDC’s guests may attend the Annual Meeting. For safety and security reasons, no cameras, audio or video recording equipment, large bags, briefcases or packages will be permitted in the meeting. In addition, each stockholder and guest may be asked to present valid, government-issued picture identification, such as a driver’s license, before being admitted to the meeting.

 

If your shares are held in the name of your broker, bank, or other nominee, you must bring to the meeting an account statement or letter from the nominee indicating that you beneficially owned the shares on April 15, 2011, the record date for receiving notice of, attending and voting at the Annual Meeting. Stockholders who do not present such information at the meeting will be admitted upon verification of ownership at the admissions counter.

 

The Chairman has broad authority to conduct the Annual Meeting in an orderly and timely manner. This authority includes establishing rules for stockholders who wish to address the meeting. The Chairman may also exercise broad discretion in recognizing stockholders who wish to speak and in determining the extent of discussion on each item of business. In light of the need to conclude the meeting within a reasonable period of time, there can be no assurance that every stockholder who wishes to speak on an item of business will be able to do so. The Chairman may also rely on applicable law regarding disruptions or disorderly conduct to ensure that the meeting is conducted in a manner that is fair to all stockholders.

 

If you have questions or need more information about the Annual Meeting, write to or call:

 

Corporate Secretary
Petroleum Development Corporation
1775 Sherman Street, Suite 3000
Denver, CO 80203
(303) 860-5800

 

For information about shares registered in your name, call PDC at 1-800-624-3821. You are also invited to visit PDC’s website at www.petd.com. Website materials are not incorporated by reference into this Proxy Statement.

 

(Proposal 1 on the Proxy Card)

 

As of the date of this Proxy Statement and as permitted by the Company’s By-Laws, the Company’s Board of Directors (“Board”) has eight members divided into three classes. Directors are usually elected for three-year terms. The terms for members of each class end in successive years.

 

The Board has nominated three continuing Class I Directors, Joseph E. Casabona, David C. Parke and Jeffrey C. Swoveland, whose terms expire in 2011 at the Annual Meeting, to stand for election to the Board for a three-year term expiring in 2014. Mr. Casabona joined the Board in 2007 and currently serves on the Audit Committee and the Planning and Finance Committee, which he chairs. Mr. Parke joined the Board in 2003 and currently serves on the Nominating and Governance Committee, the Planning and Finance Committee, and the Compensation Committee. Mr. Swoveland joined the Board in 1991 and currently serves as Presiding Independent Director and also serves on the Audit Committee, the Executive Committee, the Planning and Finance Committee and the Compensation Committee.

 

The appointed proxies will vote your proxy in accordance with your instructions and for the election of the three Class I Director Nominees unless you withhold your authority to vote for any of them. The Board does not contemplate that any of the Director Nominees will become unavailable for any reason; however, if any Director is unable to stand for election, the Board may reduce its size or choose a substitute. This proxy cannot be voted for a greater number of persons than the number of Director Nominees named or for a person who is not named in this Proxy Statement as a candidate for Director.

 

The following table sets forth certain information as of March 30, 2011, regarding the composition of the Board, including the term of each Director.

 

 

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” EACH OF THE CLASS I NOMINEES TO THE BOARD OF DIRECTORS SET FORTH IN THIS PROPOSAL NO. 1. PROXIES SOLICITED BY THE BOARD WILL BE SO VOTED UNLESS STOCKHOLDERS SPECIFY A CONTRARY VOTE. THE PROXIES WILL BE VOTED IN ACCORDANCE WITH THE STOCKHOLDERS’ SPECIFICATIONS. DIRECTORS ARE ELECTED BY A PLURALITY OF THE VOTE.

 

(Proposal 2 on the Proxy Card)

 

The stockholders of the Company are entitled to cast an advisory vote at the Annual Meeting to approve the compensation of the Company’s Named Executive Officers, as disclosed in this Proxy Statement. While this stockholder vote on executive compensation is an advisory vote that is not binding on the Company or the Board of Directors, the Company values the opinions of its stockholders and will take into consideration the outcome of the vote when making future compensation decisions.

 

As described more fully in the “Compensation Discussion and Analysis” section of this Proxy Statement, the Company’s executive compensation program is designed to attract, motivate and retain individuals with the skills required to formulate and drive the Company’s strategic direction and achieve annual and long-term performance necessary to create stockholder value. The program also seeks to align executive compensation with stockholder value on an annual and long-term basis through a combination of base pay, annual incentives and long-term incentives.

 

The Company’s practice of placing a significant portion of each Named Executive Officer’s compensation at-risk demonstrates its pay-for-performance philosophy. In 2010, at least 69% of the target 2010 compensation level for each Named Executive Officer of the Company was in the form of “at-risk” elements (i.e., incentive cash compensation, stock appreciation rights (“SARs”) and restricted stock units). For the Company’s CEO, Mr. McCullough, this figure was 78%.

 

The Company’s Named Executive Officers all have been granted significant equity to encourage a stake in the Company’s long-term success, and none of such officers has ever sold any shares after receipt. The Company has also instituted Stock Ownership Guidelines and increased the ownership requirements under such guidelines in

early 2011. The Company believes that this “tone at the top” guides the Company’s other officers and members of management to obtain and maintain meaningful ownership stakes in the Company.

 

As discussed later in this Proxy Statement, fiscal 2010 was a very good year for the Company in many key areas, and the Company believes that the compensation paid to the Named Executive Officers was appropriate in light of the Company’s achievements, including the following:

 

 

In light of the above, the Company believes that its compensation of the Named Executive Officers for fiscal 2010 was appropriate and reasonable, and that its compensation programs and practices are sound and in the best interest of the Company and its stockholders.

 

Stockholders are being asked to vote on the following resolution:

 

RESOLVED, that the Company’s stockholders approve, on an advisory basis, the compensation of the Company’s Named Executive Officers, as disclosed pursuant to the compensation disclosure rules of the Securities and Exchange Commission, including the Compensation Discussion and Analysis, the compensation tables, narrative disclosure and any related material disclosed in this Proxy Statement.

 

This advisory vote will be approved if it receives the affirmative vote of a majority of shares of common stock of the Company cast at the Annual Meeting and entitled to vote with respect to this proposal. Broker non-votes and abstentions will not affect the outcome of this proposal. If no voting specification is made on a properly returned or voted proxy card, the proxies named on the proxy card will vote FOR the above resolution.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE RESOLUTION SET FORTH IN THIS PROPOSAL NO. 2. PROXIES SOLICITED BY THE BOARD WILL BE SO VOTED UNLESS STOCKHOLDERS SPECIFY A CONTRARY VOTE. THE PROXIES WILL BE VOTED IN ACCORDANCE WITH THE STOCKHOLDERS’ SPECIFICATIONS.

 

(Proposal 3 on the Proxy Card)

 

The stockholders of the Company are entitled to cast an advisory vote at the Annual Meeting to determine how frequently they should consider and cast an advisory vote to approve the compensation of the Company’s Named Executive Officers. The choices are: annually, every other year, or every three years or abstain.

 

The Company, the Compensation Committee and the Board of Directors believe that it is appropriate and in the best interests of the Company for the Company’s stockholders to cast an advisory vote on executive compensation every three years, for the following reasons:

 

 

 

In light of the above, the Company believes that its resources in preparing for and seeking an advisory vote on executive compensation would be most effectively deployed every three years, as opposed to every one or two years.

 

Stockholders are being asked to vote on the following resolution:

 

RESOLVED, that a non-binding advisory vote of the Company’s stockholders to approve, on an advisory basis, the compensation of the Company’s Named Executive Officers, as disclosed pursuant to the compensation disclosure rules of the Securities and Exchange Commission, including the Compensation Discussion and Analysis, the compensation tables, narrative disclosure and any related material disclosed in this Proxy Statement, be held at an Annual Meeting of the Stockholders, beginning with the 2011 Annual Meeting of the Stockholders, (1) every year, (2) every two years, or (3) every three years.

 

The advisory vote on the frequency of future stockholder advisory votes on the Company’s executive compensation is non-binding on the Board. Stockholders will be able to specify one of four choices for this proposal on the proxy card: one year, two years, three years or abstain. Stockholders are not voting to approve or disapprove the Board’s recommendation. Although non-binding, the Board and the Compensation Committee will carefully review the voting results. The Company values the opinions of its stockholders and will consider the outcome of the vote when making its determination regarding how frequently this advisory vote will be held.

Notwithstanding the Board’s recommendation and the outcome of the stockholder vote, the Board may in the future decide to conduct advisory votes on a more or less frequent basis and may vary its practice based on factors such as discussions with stockholders and the adoption of material changes to compensation programs. Shares represented by proxies that are marked to indicate abstentions from this proposal and broker non-votes with respect to this proposal will not affect its outcome. If no voting specification is made on a properly returned or voted proxy card, the proxies named on the proxy card will vote FOR a frequency of three years for future advisory votes regarding executive compensation.

 

THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE “FOR” A FREQUENCY OF THREE YEARS WITH RESPECT TO THE RESOLUTION SET FORTH IN THIS PROPOSAL NO. 3. PROXIES SOLICITED BY THE BOARD WILL BE SO VOTED UNLESS STOCKHOLDERS SPECIFY A CONTRARY VOTE. THE PROXIES WILL BE VOTED IN ACCORDANCE WITH THE STOCKHOLDERS’ SPECIFICATIONS.

 

(Proposal 4 on the Proxy Card)

 

The Audit Committee and the Board have ratified the engagement of PricewaterhouseCoopers LLP (“PwC”) as the Company’s independent registered public accounting firm with respect to the fiscal year ending December 31, 2011. The Board is submitting the appointment of PwC to the stockholders for ratification. If the appointment of PwC is not ratified, the Board will require the Audit Committee to reconsider its selection. A representative of PwC is expected to be present at the meeting, will have an opportunity to make a statement if he or she so desires, and will also be available to respond to appropriate questions.

 

 

 

 

The Sarbanes-Oxley Act of 2002 requires that all services provided to the Company by its independent registered public accounting firm be subject to pre-approval by the Audit Committee or authorized Audit Committee members. The Audit Committee has adopted policies and procedures for pre-approval of all audit services and non-audit services to be provided by the Company’s independent registered public accounting firm. Services necessary to conduct the annual audit must be pre-approved by the Audit Committee annually. Permissible non-audit services to be performed by the independent accountant may also be approved on an annual basis by the Audit Committee if they are of a recurring nature. Permissible non-audit services, which are not eligible for annual pre-approval, to be conducted by the independent accountant must be pre-approved individually by the full Audit Committee or by an authorized Audit Committee member. Actual fees incurred for all services performed by the independent accountant will be reported to the Audit Committee after the services are fully performed. The duties of the Committee are described in the Audit Committee Charter, which is available at the Company’s website under “Corporate Governance.”

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THIS PROPOSAL NO. 4. PROXIES SOLICITED BY THE BOARD WILL BE SO VOTED UNLESS STOCKHOLDERS SPECIFY A CONTRARY VOTE. THE PROXIES WILL BE VOTED IN ACCORDANCE WITH THE STOCKHOLDERS’ SPECIFICATIONS. THE AFFIRMATIVE VOTE OF A MAJORITY OF THE SHARES OF COMMON STOCK CAST AT THE MEETING REPRESENTED IN PERSON OR BY PROXY AND ENTITLED TO VOTE AT THE MEETING IS REQUIRED FOR APPROVAL OF THIS PROPOSAL NO. 4.

 

The Audit Committee of the Board is composed of four Directors and operates under a written charter adopted by the Board. Each member of the Audit Committee meets the independence requirements of Rule 5605(a)(2) of the NASDAQ listing standards and other applicable standards. The duties of the Audit Committee are summarized in this Proxy Statement under “Committees of the Board of Directors” and are more fully described in its charter, which is available at the Company’s website under “Corporate Governance.”

 

Management is responsible for the Company’s internal controls and preparation of the consolidated financial statements in accordance with generally accepted accounting principles. The Company’s independent registered public accounting firm is responsible for performing an independent audit of the Company’s consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”) and issuing a report thereon. The Audit Committee’s responsibilities include monitoring and overseeing these processes.

 

The Audit Committee met nine times during 2010. In addition, the Audit Committee authorized each Audit Committee member to serve on a sub-committee of the Audit Committee to review and approve SEC filings and other actions of the partnerships for which the Company serves as general partner. The sub-committee met an additional ten times during 2010 to review such partnership filings. The Audit Committee and sub-committee have continued to meet frequently during 2011.

 

The Audit Committee reviewed and discussed the Company’s audited consolidated financial statements for the year ended December 31, 2010 (the “audited financial statements”) with management and the Company’s independent registered public accounting firm, PricewaterhouseCoopers LLP (“PwC”). The Audit Committee also discussed with PwC the matters required to be discussed by Statement of Auditing Standards No. 61 (Codification of Statements of Auditing Standards AU § 380) as adopted by the PCAOB in Rule 3200T, as amended, and PwC directly provided reports on significant matters to the Audit Committee.

 

The Audit Committee has received the written disclosures and the letter from PwC required by PCAOB Rule 3526 and has discussed with PwC its independence from the Company.

 

The Audit Committee has discussed with management and PwC such other matters and received such assurances from them as the Audit Committee deemed appropriate.

Based on the foregoing review and discussions and relying thereon, the Audit Committee recommended that the Board include the audited financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ending December 31, 2010.

 

The Board approved the Audit Committee’s recommendation to appoint PwC to serve as the Company’s independent registered public accounting firm for the year ended December 31, 2011. This appointment is subject to ratification by the Company’s stockholders.

 

Anthony J. Crisafio, Chair
Joseph E. Casabona
Jeffrey C. Swoveland
Kimberly Luff Wakim

 

AUDIT COMMITTEE
of the Board of Directors

 

As of the date of this Proxy Statement, the Board is not aware of any matters to be brought before the 2011 Annual Meeting other than the matters set forth in this Proxy Statement. However, if other matters properly come before the meeting, it is the intention of the proxy holders named in the enclosed form of proxy to vote in accordance with their discretion on such matters pursuant to such proxy.

 

The following table sets forth certain information regarding beneficial ownership of the Company’s common stock, par value $0.01 per share, as of April 1, 2011, by (1) each person known by the Company to own beneficially more than 5% of the outstanding shares of common stock; (2) each Director of the Company; (3) each Named Executive Officer; and (4) all Directors and executive officers as a group. Except as otherwise indicated, each person has sole voting and investment power with respect to all shares shown as beneficially owned, subject to community property laws where applicable. Voting power is the power to vote or direct the voting of securities, and dispositive power is the power to dispose of or direct the disposition of securities. As of April 1, 2011, 23,475,673 common shares of the Company were outstanding. Except as otherwise indicated, the address for each of the named security holders is 1775 Sherman Street, Suite 3000, Denver, Colorado 80203.

 

 

 

 

 

Section 16(a) of the Securities Exchange Act of 1934 (“Exchange Act”) requires the Company’s officers and Directors, and persons who own more than 10% of the Company’s common stock, to file reports of ownership and changes in ownership with the SEC. Officers, Directors and holders of more than 10% of the common stock are required by regulations promulgated by the SEC pursuant to the Exchange Act to furnish the Company with copies of all Section 16(a) forms they file. If requested, the Company assists officers and Directors, and will assist beneficial owners, if requested, of more than 10% of the common stock, in complying with the reporting requirements of Section 16(a) of the Exchange Act.

 

Based solely on a review of the copies of such forms received by it, the Company believes that for the year ended December 31, 2010, all Section 16(a) filing requirements applicable to its Directors, officers and greater than 10% beneficial owners were met, with the exception of a late Form 4 for Mr. Mazza related to a time-based restricted stock grant and two late Form 4s filed by Mr. R. Scott Meyers, an officer of the Company, also related to grants of time-based restricted stock.

 

The Board has adopted Corporate Governance Guidelines that govern the structure and functioning of the Board and establish the Board’s policies on a number of corporate governance issues. The Corporate Governance Guidelines were most recently amended on September 11, 2010, and are posted under the Corporate Governance section on the Company’s website, together with the following governance documents:

 

By-Laws
Code of Business Conduct and Ethics
Director Nomination Procedures
Insider Trading Policy
Shareholder Communication Policy
Audit Committee Charter
Compensation Committee Charter
Nominating and Governance Committee Charter
Executive Committee Charter
Planning and Finance Committee Charter
Presiding Independent Director Charter

 

These documents are also available to any stockholder upon request; see “Contact Information” above.

 

The Company’s By-Laws provide that the number of members of the Board of Directors shall be designated from time to time by a resolution of the Board. Currently, the designated number of Directors is eight. The By-Laws provide that the Board shall be divided into three separate classes of Directors which are required to be as nearly equal in number as practicable. At each Annual Meeting of Stockholders one class of Directors, whose term has

expired, will be elected to a term of three years. The classes are staggered so that the term of one class expires each year. There is no family relationship between any Director or Named Executive Officer of the Company. There are no arrangements or understandings between any Director or officer and any other person pursuant to which the person was selected as an officer.

 

In affirmatively determining whether a Director is “independent,” the Board analyzes and reviews the NASDAQ listing standards, which generally provide that a Director will not be independent if:

 

 

Audit Committee members are subject to additional, more stringent NASDAQ and Exchange Act requirements.

 

The Board has reviewed business and charitable relationships between the Company and each independent (“Non-Employee”) Director to determine compliance with the NASDAQ listing standards described above and to evaluate whether there are any other facts or circumstances that might impair a Director’s independence. The Board has affirmatively determined that each of Messrs. Casabona, Crisafio, Mazza, Parke, Swoveland, Trimble and Ms. Wakim is independent under NASDAQ Listing Rule 5605 and the Exchange Act.

 

The Board of Directors has a standing Audit Committee, Compensation Committee, Nominating and Governance Committee, Planning and Finance Committee, and Executive Committee. Actions taken by these committees are reported to the Board at the next Board meeting. During 2010, each of the Company’s Directors attended at least 75 percent of all meetings of the Board of Directors and committees of which he or she was a member, with the exception of Ms. Wakim, who was ill during the second half of the fiscal year. As specified in the Company’s Corporate Governance Guidelines, Directors are strongly encouraged, but not required, to attend the Annual Meeting of Stockholders. All of the Directors attended the 2010 Annual Meeting of Stockholders held on June 4, 2010, except Ms. Wakim.

The following table identifies the members of each committee of the Board, the chair of each committee and the number of meetings held in 2010.

 

2010 BOARD AND COMMITTEE MEMBERSHIPS

 

 

 

 

The Non-Employee Directors generally meet in “executive sessions” without the presence of employee Directors at their discretion, in connection with each regularly scheduled Board meeting. Mr. Swoveland serves as Presiding Independent Director at these sessions; however, the other Non-Employee Directors may, in the event of his absence, select another Director to preside over a particular executive session.

 

The Audit Committee is composed entirely of persons whom the Board has determined to be independent under NASDAQ Listing Rule 5605(a)(2), Section 301 of the Sarbanes-Oxley Act of 2002 and Section 10A(m)(3) of the Exchange Act. Mr. Crisafio chairs the Audit Committee; the other members are Ms. Wakim and Messrs. Casabona and Swoveland. The Board has determined that all four members of the Audit Committee qualify as “financial experts” as defined by SEC regulations and that all of the Audit Committee members are independent of management. The Audit Committee’s purpose is to assist the Board in monitoring the integrity of the financial reporting process, systems of internal controls and financial statements of the Company, and compliance by the Company with legal and regulatory requirements. Additionally, the Audit Committee is directly responsible for the appointment, compensation and oversight of the independent auditors engaged by the Company for the purpose of preparing or issuing an audit report or related work and to assess the need for an internal audit function and recommend its establishment when deemed appropriate.

 

In performing its responsibilities, the Audit Committee monitors the integrity of the Company’s financial reporting process and systems of internal controls regarding finance, accounting and legal compliance; monitors the independence of the independent registered public accounting firm; and provides an avenue of communications among the independent registered public accounting firm, management and the Board. The Board has adopted an Audit Committee Charter which is posted on the Company’s website. The Board continues to assess the adequacy of the Charter on an annual basis and will revise it as necessary.

 

The Board has determined that all members of the Compensation Committee (the “Committee”) are independent of the Company under Rule 5605(a)(2) of the NASDAQ listing standards. The Board has adopted a Compensation Committee Charter which is posted on the Company’s website. The Compensation Committee revised its charter in 2010, primarily to clarify its duties with respect to non-senior executive officer compensation oversight.

 

The purpose and functions of the Committee are to: (1) oversee the development of a compensation strategy for the Company’s Named Executive Officers; (2) evaluate the performance of and set compensation for the CEO; (3) review and approve the elements of compensation for other senior executive officers of the Company; (4) negotiate the terms of employment agreements with executive officers of the Company and approve all change of control plans; (5) review the compensation of the Directors for Board and Committee work and recommend to the full Board changes in such compensation levels; (6) review and approve performance criteria and results for which bonus awards for senior executive officers will be determined, and approve bonus awards to senior executive officers; (7) recommend to the Board of Directors equity-based incentive plans necessary to implement the Company’s compensation strategy, approve all equity grants under the plans, and administer all equity-based incentive programs of the Company, which may include specific delegation to management regarding awards to non-executive officers; (8) review and approve Company contributions to retirement plans; and (9) hire and utilize outside consultants as necessary.

 

There were no Compensation Committee interlocks during fiscal year 2010.

 

The purpose and functions of the Executive Committee are to exercise the powers and duties of the Board of Directors between Board meetings and, while the Board is not in session, implement the policy decisions of the Board. The Board has adopted an Executive Committee Charter which is posted on the Company’s website.

 

The Board of Directors has determined that all members of the Nominating and Governance Committee (the “NG Committee”) are independent of the Company under Rule 5605(a)(2) of the NASDAQ listing standards. The purpose of and functions performed by the NG Committee are to: (1) assist the Board by identifying individuals qualified to become Board members and to recommend to the Board Nominees for the next Annual Meeting of Stockholders or fill any vacancies; (2) recommend to the Board corporate governance guidelines applicable to the Company; (3) lead the Board in its annual review of the Board’s performance; and (4) recommend to the Board Director Nominees for each committee. The Board has adopted a Nominating and Governance Committee Charter which is posted on the Company’s website.

 

As noted in the Corporate Governance Guidelines, the Board believes it is appropriate and efficient to combine the offices of Chairman and CEO, provided that a Presiding Independent Director is in place to preside at executive sessions of the Non-Employee Directors and otherwise provide leadership for the Non-Employee Directors. Mr. Swoveland serves as our Presiding Independent Director. His duties in that role include presiding at executive sessions of the Non-Employee Directors, reviewing agendas for Board meetings, reviewing with the CEO the CEO’s annual goals and objectives, and consulting with the Board regarding its evaluation of the performance of the CEO. Particularly at a smaller business, such as the Company, the Board believes that separation of the roles of CEO and Chairman is not necessary or efficient, which is why the same person, Mr. McCullough, serves as both our CEO and Chairman. In addition, the Board currently consists of seven Non-Employee Directors and only one management Director, further mitigating any risks associated with combining the offices of Chairman and CEO. The Board believes that Mr. Swoveland’s strong leadership as Presiding Independent Director, together with its supermajority of Non-Employee Directors and other aspects of its governance, provides appropriate independent

oversight to Board decisions and act as a counterweight to management decisions as represented by the unity of the CEO and Chairman. The Committee reviews the Corporate Governance Guidelines, including this matter, on an annual basis.

 

The purpose of the Planning and Finance Committee is to oversee the responsibilities of the Board relating to planning and finance, including to: (1) organize and oversee the Board’s participation in the development of the Company’s Strategic Plan and the risk assessment and management process; (2) follow the progress in the implementation of the Strategic Plan and to advise the Board of Directors if additional Board action appears to be needed to assure successful implementation of the plan or if a need exists to revise the plan in the face of changing conditions or other factors; (3) assure that management is addressing personnel requirements for the successful implementation of the Strategic Plan; (4) assure that a talent-rich organization is being developed to address both current and future leadership needs; (5) assure that robust management development and succession planning processes are developed and implemented for management at all levels in the Company; and (6) work with the CFO other executive management regarding corporate financial matters including operating and capital budgets, capital structure, dividends, and other significant financial and capital issues. The Board has adopted a charter for the Planning and Finance Committee which is posted on the Company’s website.

 

Compensation of our Non-Employee Directors is reviewed annually by the Compensation Committee and approved by the Board. We use a combination of cash and stock-based incentive compensation to attract and retain qualified candidates to serve on our Board. In setting Director compensation, we consider the significant amount of time that Directors expend in fulfilling their duties as well as the competitive market for skilled Directors. In addition, we recognize that our Directors are also responsible for the oversight of 29 partnerships for which PDC is the managing general partner. No compensation is paid to employee Directors for their service on the Board.

 

In 2010, the Compensation Committee engaged Towers Watson & Co. (the “Consultant”) as the compensation consultant used to review executive compensation and to conduct an annual review of the total compensation of outside Directors. Specifically, retainer fees, potential meeting fees and stock-based long-term incentives were evaluated using, as the competitive benchmark, levels of total compensation paid to the directors of the energy companies which comprise the Company’s peer group for determining 2010 executive compensation. Below is a summary of the compensation paid to our Non-Employee Directors. All Board and Committee retainers are paid in quarterly installments.

 

Annual Board Retainer

 

The annual Board term begins on July 1 of each year. For the 2009-2010 and 2010-2011 Board terms, each Non-Employee Director received an annual cash retainer of $55,000 (inclusive of all meeting fees) for service on the Board. The Presiding Independent Director was paid an additional cash retainer of $27,500 for each year.

 

Annual Committee Retainers

 

Each Non-Employee Director receives an annual cash retainer for service on each committee on which he or she serves. In addition, the chair of each committee receives an annual retainer for his or her services as chair of the

committee. The following table shows the committee and chair retainers for the 2009 – 2010 and 2010 – 2011 Board terms.

 

COMMITTEE RETAINERS

 

 

In addition, a Special Committee consisting of Messrs. Crisafio, Mazza, Parke and Swoveland was created in 2008 to consider the potential repurchase of certain partnerships for which the Company is the managing general partner. In 2010, each Special Committee member earned a fee of $13,200 for such service, of which $9,700 was paid in 2010. Mr. Swoveland received an additional $2,500 for serving as chair of the Special Committee.

 

On the date of each Annual Meeting of Stockholders of the Company, each Non-Employee Director is awarded restricted Company stock for service on the Board. In June 2010, each Director received 5,106 shares of restricted stock. The shares received were granted under the Company’s 2005 Non-Employee Director Restricted Stock Plan (the “2005 Plan”) and the 2010 Long-Term Equity Compensation Plan, approved by stockholders in 2010 (the “2010 LTI Plan”). The restricted shares granted under the 2005 Plan vest 100% in July 2011 and the shares issued under the 2010 LTI Plan vest ratably over three years.

 

Grants to Directors in 2011 will be made under the 2010 LTI Plan and will vest over a minimum of three years in accordance with the provisions of that plan.

 

Each Non-Employee Director may choose to defer all or a portion of his/her annual cash compensation by participating in the Non-Employee Director Deferred Compensation Plan. All cash deferred into this program is invested in common stock of the Company. None of the Directors deferred compensation in 2010.

 

During 2010, each Non-Employee Director was required to hold shares of stock equal to three times his/her annual retainer. This ownership requirement was increased in 2010 from one time the annual retainer. Compliance with ownership requirements will be measured annually. Qualifying shareholdings include stock owned directly and unvested restricted stock. Directors are required to comply with the ownership guidelines within three years of their election to the Board. Based on ownership as of December 31, 2010, all Directors met the current guidelines.

 

The Company’s Insider Trading Policy expressly prohibits independent Directors from engaging in options, puts, calls or other transactions that are intended to hedge against the economic risk of owning Company shares.

 

The table below summarizes the compensation paid to the Non-Employee Directors for fiscal year 2010.

 

DIRECTOR COMPENSATION

 

 

 

 

The Board has adopted Director Nomination Procedures that prescribe the process the NG Committee will use to select the Company’s nominees for election to the Board. The NG Committee evaluates each candidate based on the candidate’s level and diversity of experience and knowledge (specifically within the industry and relevant industries in which the Company operates, as well as his or her overall experience and knowledge), skills, education, reputation, integrity, professional stature and other factors that may be relevant depending on the particular candidate.

 

Additional factors considered by the NG Committee include the size and composition of the Board at the time, and allowing the Company to benefit from having a broad mixture of skills, experience and perspectives on the Board. Accordingly, one or more of these factors may be given more weight in a particular case at a particular time, although no single factor is viewed as determinative. The NG Committee has not specified any minimum qualifications that it believes must be met by any particular Nominee. The Company’s Director Nomination Procedures are posted on the Company’s website.

 

The NG Committee identifies Director candidates primarily through recommendations made by the Non-Employee Directors. These recommendations are developed based on the Non-Employee Directors’ knowledge and experience in a variety of fields, and research conducted by PDC staff at the NG Committee’s direction. The NG Committee also considers recommendations made by the employee Director, employees, stockholders, and others, including search firms. All recommendations, regardless of the source, are evaluated on the same basis against the criteria contained in the guidelines. The NG Committee has the authority to engage consultants to help identify or evaluate potential Director Nominees, but has not done so recently. Our most recent new Director, Mr. Trimble, was recommended by several Non-Employee Directors.

 

In addition to qualities of intellect, integrity and judgment, the NG Committee takes into consideration diversity of background, senior management experience, education, and an understanding of some combination of oil and gas marketing, finance, technology, government regulation, and public policy. The NG Committee makes its determination in the context of an assessment of the perceived needs of the Board at that point in time. The NG Committee evaluates all Director Nominees, including Nominees recommended by stockholders, using these criteria. The Director nomination process specifically includes disclosure of the diversity provided by each candidate, and diversity is considered as part of the overall assessment of the Board’s functioning and needs.

 

The NG Committee will consider Director candidates recommended by stockholders of the Company on the same basis as those recommended by other sources. Any stockholder who wishes to recommend a prospective Director Nominee should notify the NG Committee of the recommendation by writing to the NG Committee at the Company’s headquarters or by sending the information via email to board@petd.com. All recommendations will be reviewed by the NG Committee.

 

A submission recommending a candidate should include:

 

 

Stockholders who wish to may nominate candidates for election to the Board. The Company’s By-Laws require stockholders who wish to submit nominations of persons for election to the Board of Directors at the Annual Meeting of Stockholders to follow certain procedures. The stockholder must give written notice to the Corporate Secretary at Petroleum Development Corporation, 1775 Sherman Street, Suite 3000, Denver, Colorado 80203 or may email notice to board@petd.com not later than 80 days nor more than 90 days prior to the first anniversary of the preceding year’s Annual Meeting. If the date of the Annual Meeting is more than 30 days before or more than 60 days after that anniversary date, however, for notice by such stockholder to be timely, it must be received not later than 80 days before such Annual Meeting, or within 10 days following the Company’s public announcement of the date of its Annual Meeting. The stockholder must be a stockholder of record at the time the notice is given. The written notice must set forth (1) as to each Nominee all information relating to that person that is required to be disclosed in solicitations of proxies for election of Directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Exchange Act (including such person’s written consent to being named in the Proxy Statement as a Nominee and to serving as a Director if elected); (2) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination is made (a) the name and address of the stockholder, as they appear on the Company’s books, and of such beneficial owner and (b) the class and number of shares of the Company’s securities that are beneficially owned by such stockholder and the beneficial owner; and (3) any material interest of such stockholder and such beneficial owner in such nomination.

 

The Board seeks to understand and oversee critical business risks. Risks are considered in every business decision, including through Board oversight of the Company’s internal Risk Management system. For instance, a special assessment of risks (financial and otherwise) is included in every acquisition proposal to the Board. The Board realizes, however, that it is not possible to eliminate all risk, nor is it desirable, and that appropriate risk-taking is essential in order to achieve the Company’s objectives.

 

The Board is responsible for general oversight of the risks of the Company. The Planning and Finance Committee leads this effort, primarily by overseeing risks related to the Company’s key strategic goals. Other committees, however, are active in managing the risks related to such committees’ oversight areas. For example, the Audit Committee reviews many risks and related controls in areas that it considers fundamental to the integrity and reliability of the Company’s financial statements, such as counterparty risks and derivative program risks. Similarly, the Compensation Committee considers risks related to the structure and size of the Company’s compensation plans, as noted below.

 

We do not believe the Company’s executive and non-executive compensation structure is reasonably likely to have a material adverse effect on the Company. With respect to specific elements of compensation and risk analysis:

 

Base salary.  It is a fixed amount set at market rates and does not encourage excessive risk-taking.

 

Annual Incentive Plan.  It is designed to reward achievement of short-term performance metrics. Through a combination of plan design and Board and management procedures, undue risk-taking is mitigated.

 

 

Long-Term Incentives.  A number of factors mitigate risks inherent in long-term equity compensation.

 

 

Acquisition Bonus.

 

 

 

Hedging

 

 

Stockholders wishing to communicate with the Board or a committee of the Board may do so by writing to the attention of the Board or committee at the Company’s corporate headquarters or by emailing the Board at board@petd.com, with “Board” or the appropriate Board committee indicated in the subject line.

 

The Company adopted its Code of Business Conduct and Ethics, amended and restated on April 27, 2004 (the “Code of Conduct”), applicable to all Directors, officers, employees, agents and representatives of the Company and consultants. The Company’s principal executive officer, principal financial officer and principal accounting officer are subject to additional specific provisions under the Code of Conduct. The Company’s Code of Conduct is posted on its website at www.petd.com. In the event of an amendment to, or a waiver under, including an implicit waiver, the Code of Conduct, the Company will disclose the information on its website. During the 2010 fiscal year, the Board approved a waiver regarding any potential conflict related to the service of Mr. Swoveland on the Board of Directors of Linn Energy LLC, which is posted on the Company’s website. If the Board becomes aware of a potential conflict in the future, it will consider at that time whether or not to continue this waiver for Mr. Swoveland.

 

From January 1, 2010 to the present, there was no transaction or series of transactions, or any currently proposed transaction, in which the amount involved exceeds $120,000 and in which any Director, executive officer, holder of more than five percent of the Company’s common stock or any member of the immediate family of any of the foregoing persons had or will have a direct or indirect material interest.

 

The Board has adopted a written policy for the review, approval and ratification of transactions that involve related parties and potential conflicts of interest. The related party transaction policy applies to each Director and executive officer of the Company, any nominee for election as a Director, any security holder who is known to own more than five percent of the Company’s voting securities, any immediate family member of any of the foregoing persons and any corporation, firm or association in which one or more of the Company’s Directors are Directors or officers, or have a substantial financial interest.

 

Under the related party transaction policy, a related person transaction is a transaction or arrangement involving a related person in which the Company is a participant or that would require disclosure in the Company’s filings with the SEC as a transaction with a related person. The related person must disclose to the Audit Committee

any potential related person transactions and must disclose all material facts with respect to such interest. All related person transactions will be reviewed by the Audit Committee. In determining whether to approve or ratify a transaction, the Audit Committee will consider the relevant facts and circumstances of the transaction, which may include factors such as the relationship of the related person with the Company, the materiality or significance of the transaction to the Company and the business purpose and reasonableness of the transaction, whether the transaction is comparable to a transaction that could be available to the Company on an arms-length basis, and the impact of the transaction on the Company’s business and operations.

 

The Company files annual, quarterly and current reports, proxy statements and other information with the SEC. Copies of the Company’s filings with the SEC are available to the public at the SEC’s website at http://www.sec.gov. These documents may also be viewed at the SEC’s public reference room located at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room.

 

The current Named Executive Officers of the Company, their principal occupations for the past five years and additional information is set forth below.

 

 

Richard W. McCullough. See “Proposal No. 1 – Election of Directors – Continuing Directors with Term Expiring in 2013 Class III” for Mr. McCullough’s biography.

 

Gysle R. Shellum, 59, was appointed CFO in 2008. Prior to joining the Company, Mr. Shellum served as Vice President, Finance and Special Projects of Crosstex Energy, L.P., Dallas, Texas. Mr. Shellum served in this capacity from September 2004 through September 2008. From March 2001 until September 2004, Mr. Shellum served as a consultant to Value Capital, a private consulting firm in Dallas, Texas, where he worked on various projects, including corporate finance and Sarbanes-Oxley Act compliance. Crosstex Energy, L.P. is a publicly traded Delaware limited partnership whose securities are listed on the NASDAQ Global Select Market and is an independent midstream energy company engaged in the gathering, transmission, treating, processing and marketing of natural gas and natural gas liquids.

 

Barton R. Brookman, Jr., 48, was appointed Senior Vice President Exploration and Production in March 2008. Mr. Brookman previously served as Vice President Exploration and Production upon joining PDC in July 2005. Prior to joining PDC, Mr. Brookman worked for Patina Oil and Gas and its predecessor Snyder Oil for 17 years in a series of positions of increasing responsibility, ending his service as Vice President of Operations of Patina.

 

Daniel W. Amidon, 50, was appointed General Counsel and Secretary in July 2007. Prior to joining PDC, Mr. Amidon was employed by Wheeling-Pittsburgh Steel Corporation beginning in July 2004, where he served in several positions including General Counsel and Secretary. Prior to his employment with Wheeling-Pittsburgh Steel, Mr. Amidon was employed by J&L Specialty Steel Inc. from 1992 through July 2004 in positions of increasing responsibility, including General Counsel and Secretary. Mr. Amidon practiced with the Pittsburgh law firm of Buchanan Ingersoll PC from 1986 through 1992.

 

Lance A. Lauck, 48, was appointed Senior Vice President Business Development in August 2009. Previously Mr. Lauck served as Vice President — Acquisitions and Business Development for Quantum Resources Management LLC from 2006 — 2009. From 1988 until 2006, he held various management positions at Anadarko Petroleum Corporation in the areas of acquisitions and divestitures, corporate mergers and business development.

 

The Compensation Committee of the Board of Directors of the Company has reviewed and discussed the following Compensation Discussion and Analysis with management and, based on its review and discussions, recommends its inclusion in this Proxy Statement.

 

Kimberly Luff Wakim, Chair
Anthony J. Crisafio
Larry F. Mazza
David C. Parke
James M. Trimble
Jeffrey C. Swoveland (2011)

 

COMPENSATION COMMITTEE
OF THE BOARD OF DIRECTORS

 

At PDC, we believe that our executive compensation program:

 

 

In summary, our compensation is designed to reward executives when the Company achieves strong financial and operational results. We believe the 2010 compensation of our Named Executive Officers is consistent with the strong results achieved by the Company.

 

In 2010, we accomplished the following key financial and operational results, among others:

 

 

In addition to monitoring our current executive compensation programs, the Committee accomplished the following during 2010:

 

 

 

The following Compensation Discussion and Analysis describes the Company’s compensation philosophy and the components of the Company’s compensation program, with a focus on the Named Executive Officers. The Named Executive Officers are determined in accordance with the rules of the SEC and include the principal executive officer, the principal financial officer and the next three most highly compensated executive officers, other than the principal executive and financial officers, with total compensation calculated in accordance with SEC regulations of $100,000 or more. In 2010, our Named Executive Officers were: Richard W. McCullough, CEO and Chairman; Gysle R. Shellum, CFO; Barton R. Brookman, Senior Vice President Exploration and Production; Daniel W. Amidon, General Counsel and Secretary; and Lance A. Lauck, Senior Vice President Business Development.

 

Compensation is Designed to Achieve the Company’s Objectives

 

The objectives of our compensation programs are to attract, motivate and retain highly-talented executives who can ensure that the Company is able to safely, efficiently and profitably explore for and produce natural gas and oil. The Committee is committed to a compensation package that generally establishes target total compensation at the median level for similar positions at comparable companies, but provides increased pay as a reward for above-median performance and below-median pay for performance that is less than the target. Our programs are structured to require a commitment to performance because pay at the market median is not guaranteed.

 

Compensation is Related to Performance and is Aligned with the Company’s Strategic Plan

 

The total compensation packages for Named Executive Officers are generally weighted in favor of at-risk compensation through both annual and long-term performance-based incentive pay. The Committee aligns its executive compensation decisions with the Company’s strategic plan and the financial and operational goals it feels are necessary to drive performance. As a result, each of our incentive programs links all or a portion of its payout to the Company’s performance on specific performance measures. The chart below reflects the fixed and at-risk components, as contemplated by the Committee for 2010, for each Named Executive Officer as a percentage of total direct compensation.

 

The following charts are not a substitute for the Summary Compensation Table. The Summary Compensation Table included in this Proxy Statement includes amounts supplemental to total direct compensation and calculates certain components of total direct compensation differently from that shown below.

 

2010 COMPENSATION

 

 

RS = Restricted Stock (time-based)
SAR = Stock Appreciation Rights

 

These charts indicate that 78% of total direct compensation for the CEO is variable and 56% is in the form of equity-based compensation, with the other Named Executive Officers having approximately 69% of their compensation as variable and 52% of their compensation in the form of equity-based compensation. In 2011, we implemented a performance share plan as part of our long-term incentive program. Although total variable pay in 2011 did not change substantially, the amount of pay tied more directly to the performance of the Company’s stock, both in absolute terms through the SARs and in relative terms through the performance share program, increased from 14% to 28% for the CEO and from 13% to 26% for the other Named Executive Officers. While restricted stock ties compensation to Company stock price performance, the percentage of restricted stock awarded in 2011 was reduced in favor of these other forms of equity that increase the executives’ at-risk compensation, including the risk, in some circumstances, of zero value. This change is illustrated below.

 

2011 COMPENSATION

 

 

PS = Performance Shares

 

Total Compensation Should Be Competitive and Encourage Retention of Executives

 

We have structured our total compensation package to be comparable with the peer group, as described below, but we do not generally offer above-market pay except for outstanding performance when performance targets have been exceeded. The Committee benchmarks each element of total direct compensation (which includes base salary, annual and long-term incentives) and the mix of compensation (cash versus equity) against the comparator group. We generally target base salary and total compensation at the median of the comparator group for median performance in order to remain competitive for executive talent and to retain our current executive leadership. In addition, to encourage retention, there is a substantial risk of forfeiture in the long-term incentives in the event an executive voluntarily terminates employment.

 

Incentive Compensation Balances Short-Term and Long-Term Performance

 

Our compensation programs are designed to maintain a balance between rewarding the achievement of strong short-term or annual results and ensuring the Company’s long-term growth and success. To this end, a mix of annual and long-term incentives is allocated in a manner generally consistent with the comparator group of companies The Committee also considers what it believes to be the appropriate balance of risk in each program. Participation in both the annual and long-term incentive programs increases at higher levels of responsibility, as executives in these leadership roles have the greatest influence on the Company’s strategic direction and results over time.

 

Peer Groups and Survey Data Help Establish Target Total Compensation and Define Competitive Levels of Performance

 

The Committee annually looks at the composition of a peer group of companies to help establish target total direct compensation for each executive. Each potential peer is reviewed for size, scope, nature of business operations, ownership structure, prior financial performance and current financial scope including market capitalization, enterprise value, revenue, EBITDA, capital expenditures and assets. The Committee then assesses whether changes to the peer group are warranted based on changes in size and/or operations to the peer company, changes in size and operations of the Company, and other factors that may make a peer company no longer

comparable. The Committee also uses proprietary survey benchmarking data from a broader sample of comparably-sized oil and gas companies in order to provide an additional market perspective. The Committee uses both the peer and survey benchmarking data to establish a dollar level for target total direct compensation for each executive at approximately the market median.

 

The Committee made some changes to the peer group for determining 2010 and 2011 compensation levels as outlined below:

 

 

The Committee also uses most of the 2011 peer group in the 2011 performance share program under the Company’s 2010 LTI Plan. For a detailed description of the peer group under the performance share program, see “Long-Term Incentives – 2011 Performance Share Program.”

 

Compensation Should Be Tax Deductible to the Extent Possible

 

The Committee considers the impact of the applicable tax laws with respect to compensation paid under the Company’s plans, arrangements and agreements. Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”) disallows, with certain exceptions, a federal income tax deduction for annual compensation over $1 million paid to any covered employee. The covered employees are the principal executive officer, principal financial officer and the three most highly-compensated officers other than the principal executive officer or principal financial officer. An exception to the deduction limit is provided under Code Section 162(m) for performance-based compensation paid pursuant to stockholder-approved plans that meet certain criteria.

 

Elements of the executive compensation program are performance-based, such as stock options, SARs and performance-based equity awards issued under the Company’s 2004 and 2010 LTI Plans. Other aspects of the executive compensation program do not qualify as performance-based, such as time-based restricted stock and the Company’s annual incentive bonus program, because, in the case of time-based restricted stock, the Committee believes a portion of compensation should be based on the length of continued service with the Company and, in the case of the annual incentive bonus program, the Committee prefers to maintain the ability to exercise discretion in evaluating a portion of the participant’s performance. It is our intent to maximize our income tax deductions by qualifying compensation paid to our top executives as performance-based compensation under Code

Section 162(m) where practicable under our compensation policies. The Committee nonetheless may approve compensation that may not qualify for the compensation deduction if, in light of all applicable circumstances, the Committee believes that it would be in our best interest to exercise our discretion for such compensation to be paid. The financial implications of a potential lost deduction were not material in prior years but may now have an impact. The Committee will continue to monitor its position on the impact of Code Section 162(m) on the Company’s executive compensation programs.

 

Section 409A of the Code provides that all amounts deferred under a nonqualified deferred compensation plan are currently included in gross income, to the extent not subject to a substantial risk of forfeiture and not previously included in gross income, unless certain requirements are met. We believe we have designed or amended our plans and programs to either be exempt from Code Section 409A or, if subject to Code Section 409A, in compliance with applicable regulations to properly allow deferral.

 

Executives Are Required to Own Stock

 

Consistent with the goal of driving long-term value creation for stockholders, the Company’s stock ownership guidelines require significant executive stock ownership. In 2011, the Company increased its ownership guidelines for our executives. As of December 31, 2010, the Named Executive Officers’ stock holdings relative to their 2010 and 2011 stock ownership guidelines are as set forth below:

 

 

Qualifying shareholdings include stock owned directly, shares held in the Company’s 401(k) and profit sharing plan, and unvested time-based restricted stock as of December 31, 2010. Stock options, SARs and performance-based awards are not qualifying shareholdings for the purposes of the stock ownership guidelines. However, these equity interests provide the Named Executive Officers with significant additional exposure to the value of the Company’s stock.

 

For 2011, the Committee refined its guidance concerning Company stock ownership. Named Executive Officers are expected to achieve compliance with the ownership guidelines within five years of their appointment as a Named Executive Officer but are not required to purchase stock to meet these guidelines. The net shares acquired through incentive compensation plans (through the exercise of stock options, SARs, the vesting of restricted stock or performance shares) must be retained if the Named Executive Officer has not satisfied his targeted ownership. An executive’s failure to meet the stock ownership guidelines may influence an executive’s mix of cash and non-cash compensation awarded by the Committee. Executives are not permitted to hedge their shares or otherwise invest in derivatives involving Company stock. Ownership is reviewed at least annually and when compensation decisions are made.

 

Determining Target Total Direct Compensation

 

The Committee establishes the target total direct compensation for Named Executive Officers by establishing base salaries and setting long-term and annual incentive targets. When appropriate, the Committee also approves

special awards and modifies perquisites. The Committee typically reviews target total direct compensation in the first quarter of each year. When determining target total direct compensation, we consider the following:

 

 

The Committee’s view is that an executive’s compensation level should reflect the current market value of his or her services. For a Named Executive Officer who has performed well in the prior year, the predominant factor in determining target total direct compensation for the current year is the market median target total direct compensation for that position. In considering the amount and type of each component of compensation, the Committee considers the effect on all other elements to generally target total direct compensation at the market median. An individual’s actual target, and the allocation between cash and equity, may be adjusted upward or downward when other compensation components do not reflect the market median.

 

Annual and Long-Term Incentive Programs

 

The Committee annually approves plan design, including performance metrics and target payout, for annual and long-term incentive programs. These deliberations, which usually start with recommendations from management and involve discussions among the Committee, management and the Committee’s compensation consultant, usually span many meetings before a design is approved. With respect to equity programs, the Committee also considers cost of awards, dilution and burn rates. For performance-based equity awards, at the end of the performance period, the Committee certifies the level at which the performance measures were satisfied and approves the amount of incentive award payable to each Named Executive Officer.

 

Total Compensation Summaries

 

The Committee is annually provided various summaries for each Named Executive Officer designed to provide a full picture of the executive’s compensation history, as well as all compensation payable upon his or her termination of employment and upon a change of control.

 

The total compensation summaries set forth:

 

 

A separate summary reflects the value of compensation due to each Named Executive Officer under his employment agreement in certain termination scenarios, including:

 

 

With regard to each scenario, the summary includes:

 

 

Role of the Compensation Consultant

 

The Committee has the sole power to hire, terminate and approve fees for advisors, consultants and agents as it deems necessary to assist in the fulfillment of its responsibilities. The Consultant has been the Committee’s consultant for more than six years.

 

The Consultant provides the Committee with market data and counsel regarding executive officer compensation programs and practices, including specifically:

 

 

The Consultant does not make recommendations on or approve the amount of compensation of any Named Executive Officer. The Committee may request information or advice directly from the Consultant and may direct the Company to provide or solicit information from the Consultant. The Consultant regularly interacts with representatives of the Company and periodically with the CEO. The Consultant attends meetings of the Committee when requested. The Committee reviews the engagement of its independent compensation consultant on an annual basis and as a part of that process reviews a summary of all services provided by the Consultant and related costs. In 2010, the Consultant did not perform any other material services for the Company.

 

Role of Management in Determining Executive Compensation

 

Our CEO plays a significant role in the Committee’s establishment of compensation levels for our other Named Executive Officers. The most significant aspects of his role in the process are:

 

 

At the Committee’s request, our Named Executive Officers may also assess the design of or make recommendations related to our compensation and benefit programs. The Committee, with input from the Consultant, determines each element of compensation for the CEO and, with input from the Consultant and the CEO,

determines each element of compensation for the other Named Executive Officers. The CEO is not present during voting or deliberations with regard to his own compensation.

 

Our Named Executive Officers’ 2010 compensation consisted principally of the following components, in addition to retirement, health and welfare plans and programs in which all of our full-time employees participate:

 

 

Based on the current and historical benchmarking reviews, we observed that the total target compensation of our Named Executive Officers has been significantly below the median of the peer companies. Due to the economic climate at the end of 2008 and early 2009, we felt it was inappropriate to make significant adjustments in compensation, even though we felt that Company and individual executive performance had been excellent. We believe the Company has assembled a strong management team and want to ensure that the team is retained and focused on the long-term growth of the Company. As a result, beginning in 2010, we adjusted total compensation to move executives closer to the market median and to recognize differences in specific roles within the Company with variations in target annual and long-term incentive levels.

 

We also used this opportunity to renegotiate the executives’ employment agreements to replace the “single trigger” with a “double trigger” when determining separation benefits following a change of control of the Company and to reduce certain benefits. The compensation adjustments were conditional upon the executive’s execution of the new employment agreement. The following describes how the amount of each compensation element was determined.

 

Base Salary

 

Base salary levels are typically considered annually as part of our performance review process as well as upon a promotion or other change in job responsibility. During our annual review of base salaries for Named Executive Officers, we primarily consider:

 

 

For 2010, after reviewing the market data and considering the other factors mentioned above, we adjusted the base salary of each of our Named Executive Officers to be closer to the median of the market as outlined in the “Summary Compensation Table.” The Committee plans to continue this approach in 2011.

 

Annual Incentives

 

Each year, we approve a target annual incentive award for each Named Executive Officer. These target awards are expressed as a percentage of base salary and generally produce, when combined with long-term incentives, total target compensation at the median of the peer group. Actual awards can range up to 200% of these targets based on the achievement of Company and individual goals.

2010 Bonus Targets

 

For 2010, we approved target incentive awards as follows:

 

 

 

 

2010 Performance Measures

 

For 2010, we substantially changed the corporate performance metrics to better tie to the Company’s updated corporate strategy. In early 2010, we established targets for the corporate performance metrics based on our 2010 budget targets and individual goals for each of our Named Executive Officers that align with our strategy and future vision for the Company. To provide the Committee the flexibility it needs to adjust for and react to economic events, such as dramatic changes in commodity prices or volatile capital markets, we prefer not to rely solely on a formulaic approach based on pre-established thresholds that result in automatic payouts. The Committee always retains discretion to adjust actual awards as it thinks appropriate given all the circumstances at the time of award.

 

We used the following five quantitative financial and operational metrics in 2010 to measure corporate performance:

 

 

Following the end of the 2010 fiscal year, the Committee determined annual incentive payments as follows:

 

 

2010 Actual Results

 

Upon completion of the fiscal year, we reviewed (1) the Company’s performance on the quantitative performance measures described above; and (2) the Company’s progress on and achievement of our qualitative goals, and made a subjective determination with respect to the Company’s achievement as compared to those metrics.

 

Actual results for 2010 were as follows:

 

 

 

 

In evaluating the results, the Committee considered the following:

 

 

Overall, we determined that the Company performed well on both the financial metrics and the operational metrics and that the stock performed very well on both an absolute and relative basis. As a result, after reviewing the

2010 results with a focus on the above-mentioned factors, the Committee determined that an overall corporate performance rating of 150% should be applied to each Named Executive Officer’s annual incentive award target.

 

Generally, the Committee believes that Company performance is a reflection of all Named Executive Officers’ performance in total. The Committee does, however, look at the performance of the individual against his/her personal goals and may apply discretion upward or downward to reflect individual performance. For 2010, the Committee did not make any significant differentiation in annual incentive awards due to individual performance. Actual bonus amounts paid for 2010 performance reflected in the “Summary Compensation Table” are as follows:

 

 

 

 

2010 Acquisitions Bonus to Mr. Lauck

 

In addition to his annual incentive bonus described above, Mr. Lauck is eligible to receive a special bonus in the event of the completion of successful acquisitions in a given year, as determined by the Committee. This program was put in place to incent value-added growth through acquisitions as part of the Company’s five-year business plan. In determining the size of Mr. Lauck’s award, the Committee considers asset acquisitions, asset trades, joint ventures/drill to earn transactions and corporate mergers that achieve the following:

 

 

The amount of Mr. Lauck’s bonus is based on a mix of quantitative and qualitative factors, but payments made, if any, will be discretionary. In determining Mr. Lauck’s acquisition bonus for 2010, the Committee considered how PDC’s 2010 acquisition program achieved the desired results highlighted above. In 2010, we executed various purchase and sale agreements totaling $162 million to acquire properties containing an estimated 141 Bcfe of proved plus probable reserves, resulting in an acquisition finding and development cost for proved and probable reserves of only $1.15 per Mcfe. In addition, the 2010 program acquired reserves that consisted of 66% crude oil and natural gas liquids, a key focus for the Company in 2010. The acquisition program established a new core area for the Company in the Wolfberry Trend in the Permian basin which was enabled in part through a like-kind exchange that included a trade-out of our fully developed gas assets in Michigan. The acquired assets project value-added reserve and production growth.

 

The value that acquisitions bring to the Company is based on a number of factors, including production curves, capital costs and drilling pace, operating costs, etc., that are not entirely within the control of the Company at the time of acquisition. To account for these factors, Mr. Lauck’s acquisition bonus is paid over two years. Half of the bonus is paid in the first quarter of the year following the year in which the transaction occurred, based upon the initial projections in the year of the transaction. The remaining amount is paid in year two based on a post-transaction look-back evaluation of the transaction updated for actual results. To avoid placing too much emphasis on this program as a part of Mr. Lauck’s overall compensation package, the most he can receive under the annual incentive plan and acquisitions bonus in the aggregate for a given year is 200% of his base salary.

 

In 2010, the Committee considered four acquisitions. The Committee established an acquisition bonus pool for 2010 of $309,000 for numerous employees based on a percentage of its evaluation of the total economic value to the

Company of such acquisitions; this percentage for the acquisition bonus pool varied from 0.1% to 0.3% of the economic value of each acquisition. After reviewing the successful results of the 2010 acquisition program, the Committee awarded Mr. Lauck $154,500 (50% of the acquisition bonus pool), of which $77,250 was paid in 2011 and the remaining $77,250 will be paid in 2012 contingent upon the Committee’s determination of the updated actual results from a post-transaction look-back evaluation of revised projections.

 

2011 Bonus Targets

 

Based on the peer and survey data, we further adjusted bonus targets in 2011 to move total cash compensation closer to the median, as follows:

 

 

 

 

Long-Term Incentives

 

The Committee uses a combination of grants of restricted stock, stock options, SARs and performance shares in its mix of long-term incentives. While the Committee considers long-term incentives as primarily forward-looking, the Committee does consider the Named Executive Officer’s performance in the prior year in determining the size of the awards. Generally, the Committee considers competitive market data, previous equity awards, equity ownership levels of the Named Executive Officers and the mix of cash/equity compensation levels that is necessary to place our Named Executive Officers at the median of the latest available compensation data for total direct compensation (base salary, bonus and LTI combined).

 

In 2009, the Committee granted a mix of 75% time-based restricted shares, which vest ratably over four years, and 25% performance shares tied to specific stock price performance thresholds over three to five years (as described below). The Committee did not believe the outstanding performance shares were performing as designed due to the volatility of oil and gas prices. It is important to the Committee to provide a direct link to growth in stock price, but it also believed that retention of our Named Executive Officers was important during the economic downturn.

 

In 2010, our stockholders approved the 2010 LTI Plan. The Committee granted 75% as restricted stock and awarded 25% as SARs, both vesting ratably over three years to be more competitive with our peers. During late 2010, early 2011, the Committee reviewed various approaches to long-term compensation with a view toward developing a 2011 program that was more performance-driven, market-competitive and aligned the interests of our Named Executive Officers with the interests of stockholders. The Committee also considered the importance of relative stock price performance as a key measure for stockholders. As a result of this analysis, in 2011 the mix of long-term incentives was changed and the Committee implemented a performance share program providing that half of an executive’s award would be performance-based. The Committee reduced the percentage of time-based restricted stock from 75% to 50%, and granted 25% SARs and 25% performance shares. The performance shares may be earned at the end of the three-year performance period upon the achievement of specific relative TSR. The time-based restricted shares and SARs vest ratably over three years.

 

The Committee typically makes equity grants in the first quarter of the year, but it may make equity grants to Named Executive Officers at any time during the year. The Committee does not coordinate the timing of equity grants with the release of material non-public information. If in possession of such information, the Committee does not take such information into account when determining whether or in what amounts to make such grants.

The table below shows the long-term incentive grants that were approved for 2010 and 2011 made to each Named Executive Officer:

 

 

The FASB ASC Topic 718 values for the 2010 grants are reflected in the “Summary Compensation” and “Grants of Plan-Based Awards” tables.

 

2011 Performance Share Program

 

Under this program, Named Executive Officers will receive shares of stock based on the Company’s TSR over the performance period from January 1, 2011 through December 31, 2013, as ranked among the comparably measured TSR of the applicable peer group. The peer companies selected by the Committee for measuring relative TSR are identical to the compensation benchmarking group with the following exceptions:

 

 

The Committee believes that the peer group appropriate for measuring relative stock price performance may be different from the peer group the Company is competing with for executive talent. We do, however, try to use the same companies whenever possible.

 

The TSR for the Company and each of the peer companies is determined by dividing (1) the Company’s average share price for the last twenty business days of the performance period, minus (2) the Company’s average share price for the twenty business days preceding the beginning of the performance period, plus (3) dividends (cash or stock based on ex-dividend date) paid per share of Company common stock over the performance period, divided by (4) the Company’s average share price for the twenty business days preceding the beginning of the performance period.

 

At the end of the performance period, payout can range from 0% — 200% of the target award as follows:

 

 

If the Company has negative TSR for the performance period, the maximum award that can be paid out under the program is 100%, regardless of relative performance.

Performance shares are paid in shares of common stock at the end of the performance period. The following outlines payment of the performance shares in the event of termination of employment prior to the end of the performance period:

 

 

Upon a change of control of the Company during the performance period, payout of the performance shares will be based on the greater of 100% or performance through the date of change of control.

 

Special Equity Grants

 

From time to time, special grants are approved by the Committee. Special grants typically take the form of restricted stock but other types of awards may be made when appropriate. Special grants are typically considered:

 

 

In August 2009, the Company hired Mr. Lauck as Senior Vice President Business Development. As part of his new hire package, the Committee awarded Mr. Lauck 16,701 shares of restricted stock that vest ratably over four years. In addition, the Committee granted 10,000 shares of restricted stock, of which 3,000 shares were granted immediately and 7,000 shares were granted coincident with his signing of his employment agreement, which was finalized and executed in January 2010. These additional shares vest ratably over two years effective upon the anniversary of his date of hire.

 

In March 2011, the Committee also made a special retention grant to Mr. Shellum. The compensation packages of chief financial officers have been very competitive in recent years and the Company has historically been behind the market. Mr. Shellum is critical to the Company’s business plan and, to ensure the retention of Mr. Shellum, a restricted share grant of 7,000 shares vesting ratably over five years was awarded. The Committee believes that the remaining officers are adequately incented due to retention grants that were made in 2008 to Messrs. McCullough, Brookman and Amidon and the new hire package awarded to Mr. Lauck.

 

Changes to Benefits and Perquisites

 

Under the terms of their prior employment agreements, Messrs. McCullough and Amidon were entitled to reimbursement of medical expenses over and above those covered under the Company’s medical plan. In 2010, as part of the renegotiation of their employment agreements, the Committee eliminated this benefit.

 

Agreements with Named Executive Officers

 

The Committee believes that severance protection can play a valuable role in attracting, motivating and retaining highly talented executives. The Committee also believes that having an existing agreement in place is preferable to negotiating an exit package at the time of a Named Executive Officer’s departure. Accordingly, the Company provides such protections for the Named Executive Officers under their employment agreements which are described in detail under “Potential Payments upon Termination or Change of Control.” The Committee considers these protections to be an important part of an executive’s compensation and consistent with competitive practices in the oil and gas industry.

Termination Prior to a Change of Control

 

The Committee believes that an important part of attracting and retaining executives is offering transitional income in the event an executive is terminated by the Company without cause, or in the event the terms of his employment change significantly enough to warrant a “good reason” for the executive to terminate employment. This also gives the Company the flexibility to make decisions regarding organizational issues with agreed-upon severance terms.

 

Change of Control

 

The Committee believes that the occurrence, or potential occurrence, of a change-of-control transaction will create uncertainty regarding continued employment. This uncertainty results from the fact that many change-of-control transactions result in significant organizational changes, particularly at the senior executive level. Change-of-control benefits are intended to encourage executive officers to remain employed with the Company during an important time when prospects for continued employment are often uncertain and to provide a measure of financial security prior to and after a change of control. Moreover, the Committee believes that the amounts to be paid under the change-of-control agreements ensure that the interests of the executives will be materially consistent with the interests of the Company’s stockholders when considering corporate transactions.

 

In 2010, the Committee reviewed the competitiveness of the employment agreements and amended and restated these agreements. The Committee looked at the level of severance benefits provided in the oil and gas industry since that is our primary competition for executive talent and determined that the level of severance benefits provided was competitive for our industry. The Committee also studied the necessity for excise tax “gross-up” on any “excess parachute payments” under Code Section 280G and determined that it was in the best interest of our stockholders not to provide such “gross-up” benefits. The agreements were renegotiated to eliminate the ability of the executive to voluntarily terminate and receive benefits following a change of control and to provide benefits only in the event the executive’s employment is terminated other than for cause or by the executive for “good reason,” within 24 months following the change-of-control transaction. The Committee believes that this structure strikes a proper balance between the incentives and the hiring, motivating and retention effects described above, without providing benefits to executives who voluntarily terminate or continue to be employed by an acquiring company. This structure may also be attractive to potential acquiring companies, which place significant value on retaining members of the executive team for some transition period. Potential acquirers may have an incentive to constructively terminate the executive’s employment to avoid paying severance; accordingly, the Committee believes it is appropriate to provide severance benefits upon a termination by the executive for “good reason.”

The following tables contain information concerning the compensation of the Company’s Named Executive Officers.