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EX-12.1 - EXHIBIT 12.1 - PENN VIRGINIA CORPpva-20140930xex121.htm
EX-10.1 - EXHIBIT 10.1 - PENN VIRGINIA CORPpva-20140930xex101.htm


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________________
 FORM 10-Q
________________________________________________________
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014 
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from              to              
 Commission file number: 1-13283
 
PENN VIRGINIA CORPORATION
(Exact name of registrant as specified in its charter)
__________________________________________________________
Virginia
 
23-1184320
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
FOUR RADNOR CORPORATE CENTER, SUITE 200
100 MATSONFORD ROAD
RADNOR, PA 19087
(Address of principal executive offices) (Zip Code)
(610) 687-8900
(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)
__________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (“Exchange Act”) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý  No  ¨
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One)
Large accelerated filer
¨
Accelerated filer
ý
Non-accelerated filer
¨
Smaller reporting company
¨
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
 As of October 24, 2014, 71,558,867 shares of common stock of the registrant were outstanding.
 




PENN VIRGINIA CORPORATION AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
 For the Quarterly Period Ended September 30, 2014
 Table of Contents
Part I - Financial Information
Item
 
Page
1.
Financial Statements:
 
 
Condensed Consolidated Statements of Operations for the Periods Ended September 30, 2014 and 2013
 
Condensed Consolidated Statements of Comprehensive Income for the Periods Ended September 30, 2014 and 2013
 
Condensed Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013
 
Condensed Consolidated Statements of Cash Flows for the Periods Ended September 30, 2014 and 2013
 
Notes to Condensed Consolidated Financial Statements:
 
 
1. Organization
 
2. Basis of Presentation
 
3. Acquisitions and Divestitures
 
4. Accounts Receivable and Major Customers
 
5. Derivative Instruments
 
6. Property and Equipment
 
7. Long-Term Debt
 
8. Income Taxes
 
9. Additional Balance Sheet Detail
 
10. Fair Value Measurements
 
11. Commitments and Contingencies
 
12. Shareholders’ Equity
 
13. Share-Based Compensation
 
14. Restructuring and Exit Activities
 
15. Interest Expense
 
16. Earnings per Share
Forward-Looking Statements
2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations:
 
 
Overview and Executive Summary
 
Key Developments
 
Results of Operations
 
Financial Condition
 
Critical Accounting Estimates
3.
Quantitative and Qualitative Disclosures About Market Risk
4.
Controls and Procedures
Part II - Other Information
1.
Legal Proceedings
6.
Exhibits
Signatures




Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
PENN VIRGINIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS unaudited
(in thousands, except per share data) 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Revenues
 
 
 
 
 
 
 
Crude oil
$
118,716

 
$
100,564

 
$
336,382

 
$
250,489

Natural gas liquids (NGLs)
9,790

 
8,212

 
27,200

 
22,652

Natural gas
13,354

 
12,872

 
47,859

 
40,465

Gain (loss) on sales of property and equipment, net
63,520

 
(186
)
 
120,295

 
(479
)
Other, net
16

 
151

 
2,886

 
1,339

Total revenues
205,396

 
121,613

 
534,622

 
314,466

Operating expenses
 
 
 
 
 
 
 
Lease operating
15,296

 
8,457

 
38,103

 
24,891

Gathering, processing and transportation
4,893

 
3,039

 
11,380

 
9,598

Production and ad valorem taxes
7,690

 
6,597

 
22,505

 
19,532

General and administrative
11,527

 
12,677

 
43,055

 
39,276

Exploration
1,986

 
3,957

 
13,995

 
18,097

Depreciation, depletion and amortization
71,999

 
62,450

 
215,623

 
178,355

Impairments
6,084

 
132,224

 
123,992

 
132,224

Total operating expenses
119,475

 
229,401

 
468,653

 
421,973

Operating income (loss)
85,921

 
(107,788
)
 
65,969

 
(107,507
)
Other income (expense)
 
 
 
 
 
 
 
Interest expense
(21,953
)
 
(20,218
)
 
(67,716
)
 
(56,505
)
Loss on extinguishment of debt

 

 

 
(29,157
)
Derivatives
66,457

 
(24,035
)
 
8,130

 
(23,208
)
Other
1,349

 
35

 
1,380

 
79

Income (loss) before income taxes
131,774

 
(152,006
)
 
7,763

 
(216,298
)
Income tax (expense) benefit
(42,113
)
 
53,106

 
339

 
75,577

Net income (loss)
89,661

 
(98,900
)
 
8,102

 
(140,721
)
Preferred stock dividends
(7,641
)
 
(1,725
)
 
(11,081
)
 
(5,175
)
Induced conversion of preferred stock
(888
)
 

 
(4,256
)
 

Net income (loss) attributable to common shareholders
$
81,132

 
$
(100,625
)
 
$
(7,235
)
 
$
(145,896
)
Net income (loss) per share:
 
 
 
 
 
 
 
Basic
$
1.13

 
$
(1.54
)
 
$
(0.11
)
 
$
(2.38
)
Diluted
$
0.87

 
$
(1.54
)
 
$
(0.11
)
 
$
(2.38
)
 
 
 
 
 
 
 
 
Weighted average shares outstanding – basic
71,536

 
65,465

 
67,909

 
61,272

Weighted average shares outstanding – diluted
103,606

 
65,465

 
67,909

 
61,272


See accompanying notes to condensed consolidated financial statements.

3



PENN VIRGINIA CORPORATION AND SUBSIDIARIES 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME unaudited
(in thousands) 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Net income (loss)
$
89,661

 
$
(98,900
)
 
$
8,102

 
$
(140,721
)
Other comprehensive income:
 

 
 

 
 
 
 
Change in pension and postretirement obligations, net of tax of $14 and $40 in 2014 and $10 and $30 in 2013
25

 
18

 
74

 
56

 
25

 
18

 
74

 
56

Comprehensive income (loss)
$
89,686

 
$
(98,882
)
 
$
8,176

 
$
(140,665
)
 
See accompanying notes to condensed consolidated financial statements.

4



PENN VIRGINIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS unaudited
(in thousands, except share data)
 
As of
 
September 30,
 
December 31,
 
2014
 
2013
Assets
 

 
 

Current assets
 

 
 

Cash and cash equivalents
$
123,690

 
$
23,474

Accounts receivable, net of allowance for doubtful accounts
188,683

 
194,403

Derivative assets
13,680

 
3,830

Deferred income taxes
6,040

 
6,065

Other current assets
6,951

 
5,924

Total current assets
339,044

 
233,696

Property and equipment, net (successful efforts method)
2,342,903

 
2,237,304

Derivative assets
8,572

 
1,552

Other assets
31,860

 
34,535

Total assets
$
2,722,379

 
$
2,507,087

 
 
 
 
Liabilities and Shareholders’ Equity
 

 
 

Current liabilities
 

 
 

Accounts payable and accrued liabilities
$
276,593

 
$
248,004

Derivative liabilities
1,045

 
10,141

Total current liabilities
277,638

 
258,145

Other liabilities
125,646

 
33,386

Deferred income taxes
145,428

 
145,752

Long-term debt
1,075,000

 
1,281,000

 
 
 
 
Commitments and contingencies (Note 11)


 


 
 
 
 
Shareholders’ equity:
 

 
 

Preferred stock of $100 par value – 100,000 shares authorized; Series A – 7,945 and 11,500 shares issued as of September 30, 2014 and December 31, 2013 and Series B – 32,500 shares issued as of September 30, 2014, each with a redemption value of $10,000 per share
4,044

 
1,150

Common stock of $0.01 par value – 128,000,000 shares authorized; 71,557,951 and 65,306,748 shares issued as of September 30, 2014 and December 31, 2013, respectively
528

 
466

Paid-in capital
1,205,302

 
891,351

Accumulated deficit
(111,415
)
 
(104,180
)
Deferred compensation obligation
3,106

 
2,792

Accumulated other comprehensive income
341

 
267

Treasury stock – 246,352 and 233,063 shares of common stock, at cost, as of September 30, 2014 and December 31, 2013, respectively
(3,239
)
 
(3,042
)
Total shareholders’ equity
1,098,667

 
788,804

Total liabilities and shareholders’ equity
$
2,722,379

 
$
2,507,087


See accompanying notes to condensed consolidated financial statements.

5



PENN VIRGINIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS unaudited
(in thousands)
 
Nine Months Ended
 
September 30,
 
2014
 
2013
Cash flows from operating activities
 

 
 

Net income (loss)
$
8,102

 
$
(140,721
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 

 
 

Loss on extinguishment of debt

 
29,157

Depreciation, depletion and amortization
215,623

 
178,355

Impairments
123,992

 
132,224

Accretion of firm transportation obligation
991

 
1,263

Derivative contracts:
 
 
 
Net losses (gains)
(8,130
)
 
23,208

Cash settlements, net
(17,836
)
 
1,625

Deferred income tax benefit
(339
)
 
(75,577
)
(Gain) loss on sales of assets, net
(120,295
)
 
479

Non-cash exploration expense
8,387

 
14,167

Non-cash interest expense
3,114

 
2,846

Share-based compensation (equity-classified)
2,638

 
4,781

Other, net
325

 
198

Changes in operating assets and liabilities, net
(16,122
)
 
52,829

Net cash provided by operating activities
200,450

 
224,834

 
 
 
 
Cash flows from investing activities
 

 
 

Acquisition, net

 
(358,239
)
Receipts (payments) to settle working capital adjustments assumed in acquisition, net
33,712

 
(43,023
)
Capital expenditures – property and equipment
(545,031
)
 
(356,964
)
Proceeds from sales of assets, net
311,913

 
653

Net cash used in investing activities
(199,406
)
 
(757,573
)
 
 
 
 
Cash flows from financing activities
 

 
 

Proceeds from the issuance of preferred stock, net
313,330

 

Payments made to induce conversion of preferred stock
(4,256
)
 

Proceeds from the issuance of senior notes

 
775,000

Retirement of senior notes

 
(319,090
)
Proceeds from revolving credit facility borrowings
377,000

 
219,000

Repayment of revolving credit facility borrowings
(583,000
)
 
(91,000
)
Debt issuance costs paid
(151
)
 
(25,199
)
Dividends paid on preferred stock
(5,165
)
 
(5,137
)
Other, net
1,414

 
(164
)
Net cash provided by financing activities
99,172

 
553,410

Net increase in cash and cash equivalents
100,216

 
20,671

Cash and cash equivalents – beginning of period
23,474

 
17,650

Cash and cash equivalents – end of period
$
123,690

 
$
38,321

 
 
 
 
Supplemental disclosures:
 

 
 

Cash paid for:
 

 
 

Interest
$
47,778

 
$
24,251

Income taxes
$
100

 
$

 
See accompanying notes to condensed consolidated financial statements.

6



PENN VIRGINIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS unaudited
For the Quarterly Period Ended September 30, 2014
(in thousands, except per share amounts)

1. 
Organization
Penn Virginia Corporation (“Penn Virginia,” the “Company,” “we,” “us” or “our”) is an independent oil and gas company engaged in the exploration, development and production of oil, natural gas liquids (“NGLs”) and natural gas in various onshore regions of the United States. Our current operations consist primarily of drilling unconventional horizontal development wells in the Eagle Ford Shale in South Texas. We also have operations in the Granite Wash in Oklahoma and the Haynesville Shale and Cotton Valley in East Texas.

2.
Basis of Presentation
Our unaudited Condensed Consolidated Financial Statements include the accounts of Penn Virginia and all of our subsidiaries. Intercompany balances and transactions have been eliminated. Our Condensed Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Preparation of these statements involves the use of estimates and judgments where appropriate. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation of our Condensed Consolidated Financial Statements have been included. Our Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes included in our Annual Report on Form 10-K for the year ended December 31, 2013. Operating results for the nine months ended September 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. Certain amounts for the 2013 period have been reclassified to conform to the current year presentation.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective on January 1, 2017. The standard permits the use of either the retrospective or cumulative effect transition method upon adoption. We are evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of ASU 2014-09 on our ongoing financial reporting.
Management has evaluated all activities of the Company, through the date upon which our Condensed Consolidated Financial Statements were issued, and concluded that, except for an increase in the borrowing base under our revolving credit facility (the “Revolver”) as discussed in Note 7, no subsequent events have occurred that would require recognition in our Condensed Consolidated Financial Statements or disclosure in the Notes to Condensed Consolidated Financial Statements.

3.
Acquisitions and Divestitures 
Acquisitions
Undeveloped Eagle Ford Acreage
In July 2014, we entered into a definitive agreement to acquire approximately 13,125 gross (11,660 net) acres in the Eagle Ford in Lavaca County, Texas. The transaction closed in August 2014 for a purchase price of $45.6 million, of which $34.9 million was paid at closing and the balance of $10.7 million will be paid over the next three years as a drilling carry.
EF Acquisition
On April 24, 2013 (the “Acquisition Date”), we acquired producing properties and undeveloped leasehold interests in the Eagle Ford (the “EF Acquisition”). The EF Acquisition was originally valued at $401 million with an effective date of January 1, 2013 (the “Effective Date”). On the Acquisition Date, we paid approximately $380 million in cash, including approximately $19 million of initial purchase price adjustments related to the period from the Effective Date to the closing, and issued to Magnum Hunter Resources Corporation (“MHR”), the seller in the EF Acquisition, 10 million shares of our common stock (the “Shares”) with a fair value of $4.23 per share. Shortly after the closing, certain of our joint interest partners exercised preferential rights related to the EF Acquisition. We received approximately $21 million from the exercise of these rights, which was recorded as a decrease to our purchase price for the EF Acquisition. Subsequent to the Acquisition Date and through December 31, 2013, we paid a total of $22.5 million, net to settle working capital adjustments assumed in the EF Acquisition.
Commencing December 2013, we were involved in arbitration with MHR. The arbitration related to disputes we had with MHR regarding contractual adjustments to the purchase price for the EF Acquisition and suspense funds that we believed MHR was obligated to transfer to us. In July 2014, we received the arbitrators determination, which required MHR to pay us a total of $35.1 million, including purchase price adjustments, revenue suspense funds due to partners and royalty owners and

7



interest ($1.3 million) on the funds since the Acquisition Date. Payment of the arbitration settlement was made by MHR in August 2014.
We accounted for the EF Acquisition by applying the acquisition method of accounting as of the Acquisition Date. The following table represents the fair values assigned to the net assets acquired and the consideration paid:
Assets
 
 
Oil and gas properties – proved
 
$
267,688

Oil and gas properties – unproved
 
119,709

Accounts receivable, net
 
107,345

Other assets
 
2,068

 
 
496,810

Liabilities
 
 
Accounts payable and accrued expenses
 
94,771

Other liabilities
 
1,500

 
 
96,271

Net assets acquired
 
$
400,539

 
 
 
Cash, net of amounts received for preferential rights
 
$
358,239

Fair value of the Shares issued to MHR
 
42,300

Consideration paid
 
$
400,539

The fair values of the acquired net assets were measured using valuation techniques that convert future cash flows to a single discounted amount. Significant inputs to valuation of oil and natural gas properties include estimates of: (i) reserves, (ii) future operating and development costs, (iii) future commodity prices, (iv) future cash flows and (v) a market-based weighted-average cost of capital. Because many of these inputs are not observable, we have classified the fair value estimates as level 3 inputs as that term is defined in U.S. GAAP.
The results of operations attributable to the EF Acquisition have been included in our Condensed Consolidated Financial Statements from the Acquisition Date. The following table presents unaudited summary pro forma financial information for the periods presented assuming the EF Acquisition and the related financing occurred as of January 1, 2012. The pro forma financial information does not purport to represent what our results of operations would have been if the EF Acquisition had occurred as of this date or the results of operations for any future periods.
 
 
Nine Months Ended
 
 
September 30, 2013
Total revenues
 
$
344,412

Net loss attributable to common shareholders
 
$
(124,172
)
Loss per share – basic and diluted
 
$
(1.84
)
Divestitures
In July 2014, we sold the rights to construct a crude oil gathering and intermediate transportation system in South Texas to Republic Midstream, LLC (“Republic”) for proceeds of $147.1 million, net of transaction costs. Concurrent with the sale, we entered into long-term agreements with Republic to provide us gathering and intermediate pipeline transportation services for a substantial portion of our current and future South Texas crude oil and condensate production. We realized a gain of $147.1 million, of which $63.0 million was recognized upon the closing of the transaction and the remaining $84.1 million was deferred and will be recognized over a twenty-five year period beginning after the system has been constructed and is operational, currently expected to be 2015. The deferred gain is included as a component of Other liabilities on our Condensed Consolidated Balance Sheets.
In July 2014, we sold our Selma Chalk assets in Mississippi for proceeds of $67.9 million, net of transaction costs and customary closing adjustments. An impairment charge of $117.9 million was recognized in the three months ended June 30, 2014 with respect to these assets.
In January 2014, we sold our natural gas gathering and gas lift assets in South Texas to American Midstream Partners, LP (“AMID”) for proceeds of approximately $96 million, net of transaction costs. Concurrent with the sale, we entered into a long-term agreement with AMID to provide us natural gas gathering, compression and gas lift services for a substantial portion of

8



our current and future South Texas natural gas production. We realized a gain of $67.3 million, of which $56.7 million was recognized upon the closing of the transaction and the remaining $10.6 million was deferred and is being recognized over a twenty-five year period. We amortized $0.1 million and $0.3 million of the deferred gain during the three and nine months ended September 30, 2014, respectively. As of September 30, 2014, $0.4 million of the remaining deferred gain is included as a component of Accounts payable and accrued expenses and $9.9 million, representing the noncurrent portion, is included as a component of Other liabilities on our Condensed Consolidated Balance Sheets.
  
4.       Accounts Receivable and Major Customers
The following table summarizes our accounts receivable by type as of the dates presented:
 
As of
 
September 30,
 
December 31,
 
2014
 
2013
Customers
$
97,139

 
$
93,288

Joint interest partners
84,112

 
76,199

Other 1
7,608

 
25,538

 
188,859

 
195,025

Less: Allowance for doubtful accounts
(176
)
 
(622
)
 
$
188,683

 
$
194,403

______________________
1 The balance as of December 31, 2013 was comprised substantially of amounts due from MHR and other parties for purchase price adjustments attributable to the EF Acquisition, which were received in August 2014.
For the nine months ended September 30, 2014, four customers accounted for $267.0 million, or approximately 65%, of our consolidated product revenues. The revenues generated from these customers during the nine months ended September 30, 2014 were $86.2 million, $72.5 million, $55.8 million and $52.6 million or 21%, 18%, 13% and 13% of the consolidated total, respectively. As of September 30, 2014, $65.2 million, or approximately 67% of our consolidated accounts receivable from customers was related to these customers. For the nine months ended September 30, 2013, three customers accounted for $124.1 million, or approximately 40% of our consolidated product revenues. The revenues generated from these customers during the nine months ended September 30, 2013 were $51.9 million, $37.7 million and $34.5 million or approximately 17%, 12% and 11% of the consolidated total, respectively. As of December 31, 2013, $34.8 million, or approximately 37% of our consolidated accounts receivable from customers, was related to these customers. No significant uncertainties exist related to the collectability of amounts owed to us by any of these customers.

5.
Derivative Instruments
We utilize derivative instruments to mitigate our financial exposure to crude oil and natural gas price volatility and, from time to time, the volatility in interest rates attributable to our debt instruments. Our derivative instruments are not formally designated as hedges.
Commodity Derivatives
We utilize collars, swaps and swaptions, which are placed with financial institutions that we believe are acceptable credit risks, to hedge against the variability in cash flows associated with anticipated sales of our future oil and gas production. While the use of derivative instruments limits the risk of adverse price movements, such use may also limit future revenues from favorable price movements.
The counterparty to a collar or swap contract is required to make a payment to us if the settlement price for any settlement period is below the floor or swap price for such contract. We are required to make a payment to the counterparty if the settlement price for any settlement period is above the ceiling or swap price for such contract. Neither party is required to make a payment to the other party if the settlement price for any settlement period is equal to or greater than the floor price and equal to or less than the ceiling price for such contract. A swaption contract gives our counterparties the option to enter into a fixed price swap with us at a future date. If the forward commodity price for the term of the swaption is higher than or equal to the swaption strike price on the exercise date, the counterparty will exercise its option to enter into a fixed price swap at the swaption strike price for the term of the swaption, at which point the contract functions as a fixed price swap. If the forward commodity price for the term of the swaption is lower than the swaption strike price on the exercise date, the option expires and no fixed price swap is in effect.

9



We determine the fair values of our commodity derivative instruments based on discounted cash flows derived from third-party quoted forward prices for NYMEX Henry Hub gas and West Texas Intermediate crude oil closing prices as of the end of the reporting period. The discounted cash flows utilize discount rates adjusted for the credit risk of our counterparties if the derivative is in an asset position and our own credit risk if the derivative is in a liability position.
The following table sets forth our commodity derivative positions as of September 30, 2014:
 
 
 
Average
 
 
 
 
 
 
 
 
 
Volume Per
 
Weighted Average Price
 
Fair Value
 
Instrument
 
Day
 
Floor/Swap
 
Ceiling
 
Asset
 
Liability
Crude Oil:
 
 
(barrels)
 
($/barrel)
 
 
 
 
Fourth quarter 2014
Collars
 
2,000

 
$
90.00

 
94.33
 
$
264

 
$

First quarter 2015
Collars
 
4,000

 
$
87.50

 
94.66
 
649

 

Second quarter 2015
Collars
 
4,000

 
$
87.50

 
94.66
 
947

 

Third quarter 2015
Collars
 
3,000

 
$
86.67

 
94.73
 
770

 

Fourth quarter 2015
Collars
 
3,000

 
$
86.67

 
94.73
 
838

 

Fourth quarter 2014
Swaps
 
11,000

 
$
93.45

 
 
 
3,301

 
40

First quarter 2015
Swaps
 
9,000

 
$
91.81

 
 
 
2,197

 

Second quarter 2015
Swaps
 
9,000

 
$
91.81

 
 
 
2,835

 

Third quarter 2015
Swaps
 
8,000

 
$
91.06

 
 
 
2,352

 

Fourth quarter 2015
Swaps
 
8,000

 
$
91.06

 
 
 
2,432

 

First quarter 2016
Swaps
 
3,000

 
$
90.84

 
 
 
1,176

 

Second quarter 2016
Swaps
 
3,000

 
$
90.84

 
 
 
1,284

 

Third quarter 2016
Swaps
 
3,000

 
$
90.84

 
 
 
1,395

 

Fourth quarter 2016
Swaps
 
3,000

 
$
90.84

 
 
 
1,447

 

First quarter 2015
Swaptions
 
1,000

 
$
88.00

 
 
 

 
252

Second quarter 2015
Swaptions
 
1,000

 
$
88.00

 
 
 

 
251

Third quarter 2015
Swaptions
 
1,000

 
$
88.00

 
 
 

 
251

Fourth quarter 2015
Swaptions
 
1,000

 
$
88.00

 
 
 

 
251

 
 
 
 
 
 
 
 
 
 
 
 
Natural Gas:
 
 
(in MMBtu)

 
($/MMBtu)
 
 

 
 
Fourth quarter 2014
Swaps
 
5,000

 
$
4.50

 
 
 
185

 

First quarter 2015
Swaps
 
5,000

 
$
4.50

 
 
 
129

 

Settlements to be received in subsequent period
 
 
 

 
 

 
 
 
52

 

Interest Rate Swaps
During the nine months ended September 30, 2014 and 2013, we had no interest rate derivative instruments in place.

10



Financial Statement Impact of Derivatives
The impact of our derivatives activities on income is included in the Derivatives caption on our Condensed Consolidated Statements of Operations. The following table summarizes the effects of our derivative activities for the periods presented:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Impact by contract type:
 
 
 
 
 
 
 
Commodity contracts
$
66,457

 
$
(24,035
)
 
$
8,130

 
$
(23,208
)
Interest rate contracts

 

 

 

 
$
66,457

 
$
(24,035
)
 
$
8,130

 
$
(23,208
)
Cash settlements and gains (losses):
 
 
 
 
 
 
 
Cash (paid) received for:
 
 
 
 
 
 
 
Commodity contract settlements
$
(7,557
)
 
$
(4,165
)
 
$
(17,836
)
 
$
1,625

Interest rate contract settlements

 

 

 

 
(7,557
)
 
(4,165
)
 
(17,836
)
 
1,625

Gains (losses) attributable to:
 
 
 
 
 
 
 
Commodity contracts
74,014

 
(19,870
)
 
25,966

 
(24,833
)
Interest rate contracts

 

 

 

 
74,014

 
(19,870
)
 
25,966

 
(24,833
)
 
$
66,457

 
$
(24,035
)
 
$
8,130

 
$
(23,208
)
The effects of derivative gains and (losses) and cash settlements of our commodity derivatives are reported as adjustments to reconcile net income (loss) to net cash provided by operating activities. These items are recorded in the Derivative contracts section of our Condensed Consolidated Statements of Cash Flows under the Net losses (gains) and Cash settlements, net captions.
The following table summarizes the fair values of our derivative instruments, as well as the locations of these instruments on our Condensed Consolidated Balance Sheets as of the dates presented:
 
 
 
Fair Values as of
 
 
 
September 30, 2014
 
December 31, 2013
 
 
 
Derivative
 
Derivative
 
Derivative
 
Derivative
Type
 
Balance Sheet Location
Assets
 
Liabilities
 
Assets
 
Liabilities
Commodity contracts
 
Derivative assets/liabilities – current
$
13,680

 
$
1,045

 
$
3,830

 
$
10,141

Interest rate contracts
 
Derivative assets/liabilities – current

 

 

 

 
 
 
13,680

 
1,045

 
3,830

 
10,141

 
 
 
 
 
 
 
 
 
 
Commodity contracts
 
Derivative assets/liabilities – noncurrent
8,572

 

 
1,552

 

Interest rate contracts
 
Derivative assets/liabilities – noncurrent

 

 

 

 
 
 
8,572

 

 
1,552

 

 
 
 
$
22,252

 
$
1,045

 
$
5,382

 
$
10,141

As of September 30, 2014, we reported a commodity derivative asset of $22.3 million. The contracts associated with this position are with seven counterparties, all of which are investment grade financial institutions, and are substantially concentrated with two of those counterparties. This concentration may impact our overall credit risk, either positively or negatively, in that these counterparties may be similarly affected by changes in economic or other conditions. We have neither paid to, nor received from, our counterparties any cash collateral in connection with our derivative positions. No significant uncertainties exist related to the collectability of amounts that may be owed to us by these counterparties.


11



6.
Property and Equipment
The following table summarizes our property and equipment as of the dates presented: 
 
As of
 
September 30,
 
December 31,
 
2014
 
2013
Oil and gas properties:
 

 
 

Proved
$
450,601

 
$
460,255

Unproved
137,464

 
101,520

Total oil and gas properties
588,065

 
561,775

Other property and equipment:
 
 
 
Wells, equipment and facilities
2,743,466

 
2,593,700

Support equipment
23,153

 
21,513

Total other property and equipment
2,766,619

 
2,615,213

 
3,354,684

 
3,176,988

Accumulated depreciation, depletion and amortization
(1,011,781
)
 
(939,684
)
 
$
2,342,903

 
$
2,237,304

In the three months ended September 30, 2014, we recognized an oil and gas asset impairment of $6.1 million in connection with an exploration prospect drilled in the Mid-Continent region. In June 2014, we entered into a definitive agreement to sell our Selma Chalk assets in Mississippi. An impairment charge of $117.9 million was recognized in the three months ended June 30, 2014 to write these assets down to fair value. The sale was completed in July 2014.


7.
Long-Term Debt
The following table summarizes our long-term debt as of the dates presented:
 
As of
 
September 30,
 
December 31,
 
2014
 
2013
Revolving credit facility
$

 
$
206,000

Senior notes due 2019
300,000

 
300,000

Senior notes due 2020
775,000

 
775,000

 
$
1,075,000

 
$
1,281,000

Revolving Credit Facility
The Revolver provides for a $450 million revolving commitment. The Revolver has an accordion feature that allows us to increase the commitment by up to an additional $150 million upon receiving additional commitments from one or more lenders. The Revolver also includes a $20 million sublimit for the issuance of letters of credit. The Revolver is governed by a borrowing base calculation, which is re-determined semi-annually, and the availability under the Revolver may not exceed the lesser of the aggregate commitments and the borrowing base. Upon the closing of the sale of our Selma Chalk assets in the third quarter of 2014, the borrowing base was reduced from $475 million to $437.5 million. In October 2014, the borrowing base was increased to $500 million in connection with the regular semi-annual redetermination. The next semi-annual redetermination is scheduled for May 2015. In addition, the Revolver was amended to clarify the requirements with respect to pro forma treatment of material acquisitions and dispositions for purposes of the leverage ratio covenant under the Revolver. The Revolver is available to us for general purposes including working capital, capital expenditures and acquisitions. The Revolver matures in September 2017. We had letters of credit of $1.7 million outstanding as of September 30, 2014. As of September 30, 2014, our available borrowing capacity under the Revolver was $435.8 million.
Borrowings under the Revolver bear interest, at our option, at either (i) a rate derived from the London Interbank Offered Rate, as adjusted for statutory reserve requirements for Eurocurrency liabilities (“Adjusted LIBOR”), plus an applicable margin (ranging from 1.500% to 2.500%) or (ii) the greater of (a) the prime rate, (b) the federal funds effective rate plus 0.5% or (c) the one-month Adjusted LIBOR plus 1.0%, plus, in each case, an applicable margin (ranging from 0.500% to 1.500%). The applicable margin is determined based on the ratio of our outstanding borrowings to the available Revolver capacity. As of September 30, 2014, the actual interest rate on the outstanding borrowings under the Revolver was 1.6875% which is derived

12



from an Adjusted LIBOR rate of 0.1875% plus an applicable margin of 1.50%. Commitment fees are charged at 0.375% to 0.500% on the undrawn portion of the Revolver depending on our ratio of outstanding borrowings to the available Revolver capacity. As of September 30, 2014, commitment fees were being charged at a rate of 0.375%.
The Revolver is guaranteed by Penn Virginia and all of our material subsidiaries (the “Guarantor Subsidiaries”). The obligations under the Revolver are secured by a first priority lien on substantially all of our proved oil and gas reserves and a pledge of the equity interests in the Guarantor Subsidiaries.
The Revolver includes both current ratio and leverage ratio financial covenants. The current ratio is defined in the Revolver to include, among other things, adjustments for undrawn availability and may not be less than 1.0 to 1.0. The leverage ratio of total net debt to EBITDAX, a non-GAAP financial measure defined in the Revolver, may not exceed 4.25 to 1.0 through December 31, 2014 and then 4.0 to 1.0 through maturity.
2019 Senior Notes
Our 7.25% Senior Notes due 2019 (the “2019 Senior Notes”), which were issued at par in April 2011, bear interest at an annual rate of 7.25% payable on April 15 and October 15 of each year. Beginning in April 2015, we may redeem all or part of the 2019 Senior Notes at a redemption price starting at 103.625% of the principal amount and reducing to 100% in June 2017 and thereafter. The 2019 Senior Notes are senior to our existing and future subordinated indebtedness and are subordinated to our secured indebtedness, including the Revolver, to the extent of the collateral securing that indebtedness. The obligations under the 2019 Senior Notes are fully and unconditionally guaranteed by the Guarantor Subsidiaries.
2020 Senior Notes
Our 2020 Senior Notes due 2020 (the “2020 Senior Notes”), which were issued at par in April 2013, bear interest at an annual rate of 8.5% payable on June 15 and December 15 of each year. The 2020 Senior Notes are senior to our existing and future subordinated indebtedness and are subordinated to our secured indebtedness, including the Revolver, to the extent of the collateral securing that indebtedness. The obligations under the 2020 Senior Notes are fully and unconditionally guaranteed by the Guarantor Subsidiaries.
The guarantees provided by Penn Virginia, which is the parent company, and the Guarantor Subsidiaries under the Revolver and the 2019 Senior Notes and 2020 Senior Notes are full and unconditional and joint and several. Substantially all of our consolidated assets are held by the Guarantor Subsidiaries. The parent company and its non-guarantor subsidiaries have no material independent assets or operations. There are no significant restrictions on the ability of the parent company to obtain funds from the Guarantor Subsidiaries through dividends, advances or loans.

8.
Income Taxes
We recognized an income tax benefit for the nine months ended September 30, 2014 at an effective rate of 4.4%. The annual effective tax rate applied to the nine months ended September 30, 2014 includes federal taxes at the statutory rate of 35%; however, the federal effect is almost entirely offset by state income tax effects, which include a deferred tax benefit associated with an expected decrease in the effective state income tax rate in future periods. The benefit is due primarily to a shift in the source of our expected future state taxable income as a result of the recent sale of all of our properties in Mississippi. Our effective tax rate also reflects the adverse effect of losses incurred in certain jurisdictions for which we may not realize a tax benefit and have therefore recorded a valuation allowance against the related deferred tax asset.
Due to the losses incurred during the three and nine months ended September 30, 2013, we recognized income tax benefits at an effective rate of 34.9%. The income tax benefit included the effect of deferred tax asset valuation allowance due primarily to the inability to recognize tax benefits for certain state net operating losses.



13



9.
Additional Balance Sheet Detail
The following table summarizes components of selected balance sheet accounts as of the dates presented:
 
As of
 
September 30,
 
December 31,
 
2014
 
2013
Other current assets:
 

 
 

Tubular inventory and well materials
$
3,946

 
$
2,271

Prepaid expenses
2,905

 
3,653

Other
100

 

 
$
6,951

 
$
5,924

Other assets:
 

 
 

Debt issuance costs
$
27,277

 
$
30,239

Assets of supplemental employee retirement plan (“SERP”)
4,021

 
3,734

Other
562

 
562

 
$
31,860

 
$
34,535

Accounts payable and accrued liabilities:
 

 
 

Trade accounts payable
$
105,888

 
$
120,278

Drilling and other lease operating costs
56,585

 
51,529

Royalties
46,672

 
39,929

Compensation – related
10,947

 
8,584

Interest
37,417

 
15,718

Preferred stock dividends
7,638

 
1,725

Other
11,446

 
10,241

 
$
276,593

 
$
248,004

Other liabilities:
 

 
 

Deferred gains on sale of assets
$
90,675

 
$

Firm transportation obligation
12,352

 
13,245

Asset retirement obligations (“AROs”)
5,808

 
6,437

Defined benefit pension obligations
1,461

 
1,579

Postretirement health care benefit obligations
1,154

 
1,023

Deferred compensation – SERP obligations and other
4,130

 
3,883

Other
10,066

 
7,219

 
$
125,646

 
$
33,386



14



10.
Fair Value Measurements
We apply the authoritative accounting provisions for measuring fair value of both our financial and nonfinancial assets and liabilities. Fair value is an exit price representing the expected amount we would receive upon the sale of an asset or that we would expect to pay to transfer a liability in an orderly transaction with market participants at the measurement date.
Our financial instruments that are subject to fair value disclosure consist of cash and cash equivalents, accounts receivable, accounts payable, derivatives and long-term debt. As of September 30, 2014, the carrying values of all of these financial instruments, except the portion of long-term debt with fixed interest rates, approximated fair value.
The following table summarizes the fair value of our long-term debt with fixed interest rates, which is estimated based on the published market prices for these debt obligations, as of the dates presented:
 
As of
 
September 30, 2014
 
December 31, 2013
 
Fair
Value
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
Senior Notes due 2019
$
300,750

 
$
300,000

 
$
307,500

 
$
300,000

Senior Notes due 2020
821,500

 
775,000

 
837,969

 
775,000

 
$
1,122,250

 
$
1,075,000

 
$
1,145,469

 
$
1,075,000

Recurring Fair Value Measurements
Certain financial assets and liabilities are measured at fair value on a recurring basis in our Condensed Consolidated Balance Sheets. The following tables summarize the valuation of those assets and liabilities as of the dates presented:
 
 
As of September 30, 2014
 
 
Fair Value
 
Fair Value Measurement Classification
Description
 
Measurement
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 

 
 

 
 

 
 

Commodity derivative assets – current
 
$
13,680

 
$

 
$
13,680

 
$

Commodity derivative assets – noncurrent
 
8,572

 

 
8,572

 

Assets of SERP
 
4,021

 
4,021

 

 

Liabilities:
 
 

 
 

 
 

 
 

Commodity derivative liabilities – current
 
(1,045
)
 

 
(1,045
)
 

Commodity derivative liabilities – noncurrent
 

 

 

 

Deferred compensation – SERP obligations
 
(4,125
)
 
(4,125
)
 

 

 
 
As of December 31, 2013
 
 
Fair Value
 
Fair Value Measurement Classification
Description
 
Measurement
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 

 
 

 
 

 
 

Commodity derivative assets – current
 
$
3,830

 
$

 
$
3,830

 
$

Commodity derivative assets – noncurrent
 
1,552

 

 
1,552

 

Assets of SERP
 
3,734

 
3,734

 

 

Liabilities:
 
 

 
 

 
 

 
 

Commodity derivative liabilities – noncurrent
 
(10,141
)
 

 
(10,141
)
 

Deferred compensation – SERP obligations
 
(3,879
)
 
(3,879
)
 

 

Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one level of the fair value hierarchy to another level. In such instances, the transfer is deemed to have occurred at the beginning of the quarterly period in which the event or change in circumstances that caused the transfer occurred. There were no transfers during the nine months ended September 30, 2014 and 2013.

15



We used the following methods and assumptions to estimate fair values for the financial assets and liabilities described below:
Commodity derivatives: We determine the fair values of our commodity derivative instruments based on discounted cash flows derived from third-party quoted forward prices for West Texas Intermediate crude oil and NYMEX Henry Hub gas closing prices as of the end of the reporting periods. We generally use the income approach, using valuation techniques that convert future cash flows to a single discounted value. Each of these is a level 2 input.
Assets of SERP: We hold various publicly traded equity securities in a Rabbi Trust as assets for funding certain deferred compensation obligations. The fair values are based on quoted market prices, which are level 1 inputs.
Deferred compensation SERP obligations: Certain of our deferred compensation obligations are ultimately to be settled in cash based on the underlying fair value of certain assets, including those held in the Rabbi Trust. The fair values are based on quoted market prices, which are level 1 inputs.
Non-Recurring Fair Value Measurements
The most significant non-recurring fair value measurements utilized in the preparation of our Condensed Consolidated Financial Statements are those attributable to the recognition and measurement of net assets acquired, the recognition and measurement of asset impairments and the initial determination of AROs. The factors used to determine fair value for purposes of recognizing and measuring net assets acquired and asset impairments include, but are not limited to, estimates of proved and probable reserves, future commodity prices, indicative sales prices for properties, the timing of future production and capital expenditures and a discount rate commensurate with the risk reflective of the lives remaining for the respective oil and gas properties. Because these significant fair value inputs are typically not observable, we have categorized the amounts as level 3 inputs.
The determination of the fair value of AROs is based upon regional market and facility specific information. The amount of an ARO and the costs capitalized represent the estimated future cost to satisfy the abandonment obligation using current prices that are escalated by an assumed inflation factor after discounting the future cost back to the date that the abandonment obligation was incurred using a rate commensurate with the risk, which approximates our cost of funds. Because these significant fair value inputs are typically not observable, we have categorized the initial estimates as level 3 inputs.

11.
Commitments and Contingencies
Drilling and Completion Commitments 
We have agreements to purchase oil and gas well drilling and well completion services from third parties with remaining terms of up to 11 months. The well drilling agreements include early termination provisions that would require us to pay penalties if we terminate the agreements prior to the end of their scheduled terms. The amount of penalty is based on the number of days remaining in the contractual term. As of September 30, 2014, the penalty amount would have been $24.4 million had we terminated our agreements on that date.
Other Commitments
We have contracts that provide firm transportation capacity rights for specified volumes per day on various pipeline systems with terms that range from 1 to 15 years. The contracts require us to pay transportation demand charges regardless of the amount of pipeline capacity we use. We may sell excess capacity to third parties at our discretion.
We have a long-term agreement that provides natural gas gathering, compression and gas lift services for a substantial portion of our natural gas production in the South Texas region through 2038. The agreement requires us to make certain minimum fee payments regardless of the volume of natural gas production for the first three years of the term. The minimum fee requirements for 2014 through 2016 are $3.7 million, $4.2 million and $5.0 million, respectively.
As discussed in Note 3, we entered into long-term agreements that provide gathering and intermediate pipeline transportation services for a substantial portion of our crude oil and condensate production in the South Texas region. Our obligations under the agreements are expected to begin in 2015 when construction of the gathering, transportation and delivery point facilities is completed. The agreements require us to commit certain minimum volumes of crude oil production for the first ten years of the agreements terms, which will result in minimum fee requirements of $13.7 million on an annual basis.
Legal and Regulatory
We are involved, from time to time, in various legal proceedings arising in the ordinary course of business. While the ultimate results of these proceedings cannot be predicted with certainty, our management believes that these claims will not have a material effect on our financial position, results of operations or cash flows. During 2010, we established a $0.9 million reserve for a litigation matter pertaining to certain properties that remains outstanding as of September 30, 2014. As of September 30, 2014, we also have AROs of approximately $5.8 million attributable to the plugging of abandoned wells.
 

16



12.
Shareholders’ Equity
The following tables summarize the components of our shareholders equity and the changes therein as of and for the nine months ended September 30, 2014 and 2013:
 
As of
 
 
 
Preferred
 
 
 
 
 
As of
 
December 31,
 
 
 
Stock
 
Dividends
 
All Other
 
September 30,
 
2013
 
Net Income
 
Offering
 
Declared 1
 
Changes 2
 
2014
Preferred stock 3
$
1,150

 
$

 
$
3,250

 
$

 
$
(356
)
 
$
4,044

Common stock 3
466

 

 

 

 
62

 
528

Paid-in capital 3
891,351

 

 
310,080

 

 
3,871

 
1,205,302

Accumulated deficit 3
(104,180
)
 
8,102

 

 
(11,081
)
 
(4,256
)
 
(111,415
)
Deferred compensation obligation
2,792

 

 

 

 
314

 
3,106

Accumulated other comprehensive income 4
267

 

 

 

 
74

 
341

Treasury stock
(3,042
)
 

 

 

 
(197
)
 
(3,239
)
 
$
788,804

 
$
8,102

 
$
313,330

 
$
(11,081
)
 
$
(488
)
 
$
1,098,667

 
 
 
 
 
 
 
 
 
 
 
 
 
As of
 
 
 
Preferred
 
 
 
 
 
As of
 
December 31,
 
 
 
Stock
 
Dividends
 
All Other
 
September 30,
 
2012
 
Net Loss
 
Offering
 
Declared 1
 
Changes 2
 
2013
Preferred stock
$
1,150

 
$

 
$

 
$

 
$

 
$
1,150

Common stock 5
364

 

 

 

 
101

 
465

Paid-in capital 5
849,046

 

 

 

 
46,404

 
895,450

Retained earnings
45,790

 
(140,721
)
 

 
(5,175
)
 

 
(100,106
)
Deferred compensation obligation
3,111

 

 

 

 
(384
)
 
2,727

Accumulated other comprehensive loss 4
(982
)
 

 

 

 
56

 
(926
)
Treasury stock
(3,363
)
 

 

 

 
386

 
(2,977
)
 
$
895,116

 
$
(140,721
)
 
$

 
$
(5,175
)
 
$
46,563

 
$
795,783

______________________
1 Includes dividends of $450.00 per share on our 6% Series A Convertible Perpetual Preferred Stock (the “Series A Preferred Stock”) and $198.33 per share on our 6% Series B Convertible Perpetual Preferred Stock (the “Series B Preferred Stock”).
2 Includes equity-classified share-based compensation of $2,638 and $4,781 for the nine months ended September 30, 2014 and 2013.
3 A total of 3,555 shares, or 355,482 depositary shares, of the Series A Preferred Stock were converted into 5,924,706 shares of our common stock during the nine months ended September 30, 2014. We made payments of $4.3 million to induce the conversion of 3,527 of these shares.
4 The Accumulated other comprehensive income (“AOCI”) is entirely attributable to our defined benefit pension and postretirement health care plans. The changes in the balance of AOCI for the nine months ended September 30, 2014 and 2013 represent reclassifications from AOCI to net periodic benefit expense, a component of General and administrative expenses, of $114 and $86 and are presented above net of taxes of $40 and $30.
5 Includes the Shares, with a fair value of $4.23 per share, that were issued to MHR in connection with the EF Acquisition.
In June 2014, we completed a private offering of 3,250,000 depositary shares each representing a 1/100th interest in a share, or 32,500 shares, of our Series B Preferred Stock, which provided approximately $313 million of proceeds, net of underwriting fees and issuance costs.
The annual dividend on each share of the Series B Preferred Stock is 6.00% per annum on the liquidation preference of $10,000 per share and is payable quarterly, in arrears, on each of January 15, April 15, July 15 and October 15 of each year. We may, at our option, pay dividends in cash, common stock or a combination thereof.
Each share of the Series B Preferred Stock is convertible, at the option of the holder, into a number of shares of our common stock equal to the liquidation preference of $10,000 divided by the conversion price, which is initially $18.34 per share and is subject to specified anti-dilution adjustments. The initial conversion rate is equal to 545.17 shares of our common stock for each share of the Series B Preferred Stock. The initial conversion price represents a premium of 30 percent relative to the last reported sales price of $14.11 per common share prior to the offering of the Series B Preferred Stock. The Series B Preferred Stock is not redeemable by us or the holders at any time. At any time on or after July 15, 2019, we may, at our option, cause all outstanding shares of the Series B Preferred Stock to be automatically converted into shares of our common stock at the then-applicable conversion price if the closing sale price of our common stock exceeds 130% of the then-applicable conversion price for a specified period prior to conversion. If a holder elects to convert shares of the Series B Preferred Stock upon the occurrence of certain specified fundamental changes, we may be obligated to deliver an additional number of shares above the applicable conversion rate to compensate the holder for lost option value.

17



13.
Share-Based Compensation
The Penn Virginia Corporation 2013 Amended and Restated Long-Term Incentive Plan (the “LTI Plan”) permits the grant of incentive and nonqualified stock options, common stock, deferred common stock units, restricted stock and restricted stock units to our employees and directors. We recognize compensation expense related to our LTI Plan in the General and administrative caption on our Condensed Consolidated Statements of Operations.
With the exception of performance-based restricted stock units (“PBRSUs”), all of the awards issued under our LTI Plan are classified as equity instruments because they result in the issuance of common stock on the date of grant, upon exercise or are otherwise payable in common stock upon vesting, as applicable. The compensation cost attributable to these awards is measured at the grant date and recognized over the applicable vesting period as a non-cash item of expense. Because the PBRSUs are payable in cash, they are considered liability-classified awards and are included in the Accounts payable and accrued liabilities (current portion) and Other liabilities (noncurrent portion) captions on our Condensed Consolidated Balance Sheets. Compensation cost associated with the PBRSUs is measured at the end of each reporting period and recognized based on the period of time that has elapsed during each of the individual performance periods.
The following table summarizes our share-based compensation expense recognized for the periods presented:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Equity-classified awards:
 
 
 
 
 
 
 
Stock option awards
$
403

 
$
612

 
$
1,193

 
$
2,518

Common, deferred and restricted stock and stock unit awards
584

 
398

 
1,445

 
2,263

 
987

 
1,010

 
2,638

 
4,781

Liability-classified awards
(360
)
 
1,095

 
6,632

 
1,544

 
$
627

 
$
2,105

 
$
9,270

 
$
6,325


14.
Restructuring and Exit Activities
We have a contractual commitment for certain firm transportation capacity in the Appalachian region that expires in 2022 and, as a result of the sale of our natural gas assets in West Virginia, Kentucky and Virginia in 2012, we no longer have production to satisfy this commitment. We recognized an obligation in 2012 representing the liability for estimated discounted future net cash outflows over the remaining term of the contract. The activity summarized below includes contractual payments on our obligations as well as the recognition of accretion expense and adjustments associated with changes in estimates.
The following table summarizes our restructuring and exit activity-related obligations and the changes therein for the periods presented:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Balance at beginning of period
$
15,559

 
$
16,677

 
$
16,090

 
$
17,263

Employee, office and other costs accrued, net
18

 
2

 
27

 
5

Accretion of firm transportation obligation
407

 
410

 
991

 
1,263

Cash payments, net
(857
)
 
(705
)
 
(1,981
)
 
(2,147
)
Balance at end of period
$
15,127

 
$
16,384

 
$
15,127

 
$
16,384

Restructuring charges are included in the General and administrative caption on our Condensed Consolidated Statements of Operations. The accretion of the firm transportation obligation, net of any recoveries from the periodic sale of our contractual capacity, is charged as an offset to Other revenue.
The current portion of our restructuring and exit cost obligations is included in the Accounts payable and accrued liabilities caption and the noncurrent portion is included in the Other liabilities caption on our Condensed Consolidated Balance Sheets. As of September 30, 2014, $2.7 million of the total obligations are classified as current while the remaining $12.4 million are classified as noncurrent.


18



15.
Interest Expense
 
The following table summarizes the components of interest expense for the periods presented:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Interest on borrowings and related fees
$
22,559

 
$
22,754

 
$
69,477

 
$
57,239

Accretion of original issue discount 1

 

 

 
431

Amortization of debt issuance costs
1,063

 
961

 
3,114

 
2,415

Capitalized interest
(1,669
)
 
(3,497
)
 
(4,875
)
 
(3,580
)
 
$
21,953

 
$
20,218

 
$
67,716

 
$
56,505

_____________________
1 Represents accretion of original issue discount attributable to our 10.375% Senior Notes due 2016 that were retired in 2013.


16.
Earnings per Share
 
The following table provides a reconciliation of the components used in the calculation of basic and diluted earnings per share for the periods presented:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Net income (loss)
$
89,661

 
$
(98,900
)
 
$
8,102

 
$
(140,721
)
Less: Preferred stock dividends
(7,641
)
 
(1,725
)
 
(11,081
)
 
(5,175
)
Less: Induced conversion of preferred stock
(888
)
 

 
(4,256
)
 

Net income (loss) attributable to common shareholders – basic
$
81,132

 
$
(100,625
)
 
$
(7,235
)
 
$
(145,896
)
Add: Preferred stock dividends 1
7,641

 

 

 

Add: Induced conversion of preferred stock 1
888

 

 

 

Net income (loss) attributable to common shareholders – diluted
$
89,661

 
$
(100,625
)
 
$
(7,235
)
 
$
(145,896
)
 
 
 
 
 
 
 
 
Weighted-average shares – basic
71,536

 
65,465

 
67,909

 
61,272

Effect of dilutive securities 2
32,070

 

 

 

Weighted-average shares – diluted
103,606

 
65,465

 
67,909

 
61,272

_______________________
1 Preferred stock dividends and payments to induce the conversion of preferred stock were excluded from diluted earnings per share for the nine months ended September 30, 2014 and the three and nine months ended September 30, 2013 as the assumed conversion of the outstanding preferred stock would have been anti-dilutive.
2 For the nine months ended September 30, 2014, approximately 24.9 million potentially dilutive securities, including the Series A Preferred Stock and Series B Preferred Stock, stock options and restricted stock units, had the effect of being anti-dilutive and were excluded from the calculation of diluted earnings per common share. For the three and nine months ended September 30, 2013, approximately 19.2 million and less than 0.1 million, respectively, potentially dilutive securities, including the Series A Preferred Stock, stock options and restricted stock units, had the effect of being anti-dilutive and were excluded from the calculation of diluted earnings per common share.

19



Forward-Looking Statements
 
Certain statements contained herein that are not descriptions of historical facts are “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Because such statements include risks, uncertainties and contingencies, actual results may differ materially from those expressed or implied by such forward-looking statements. These risks, uncertainties and contingencies include, but are not limited to, the following: 
the volatility of commodity prices for oil, natural gas liquids, or NGLs, and natural gas;
our ability to develop, explore for, acquire and replace oil and natural gas reserves and sustain production;
our ability to generate profits or achieve targeted reserves in our development and exploratory drilling and well operations;
any impairments, write-downs or write-offs of our reserves or assets;
the projected demand for and supply of oil, NGLs and natural gas;
reductions in the borrowing base under our revolving credit facility, or Revolver;
our ability to contract for drilling rigs, supplies and services at reasonable costs;
our ability to obtain adequate pipeline transportation capacity for our oil and gas production at reasonable cost and to sell the production at, or at reasonable discounts to, market prices;
the uncertainties inherent in projecting future rates of production for our wells and the extent to which actual production differs from estimated proved oil and natural gas reserves;
drilling and operating risks;
our ability to compete effectively against other oil and gas companies;
our ability to successfully monetize select assets and repay our debt;
leasehold terms expiring before production can be established;
environmental obligations, costs and liabilities that are not covered by an effective indemnity or insurance;
the timing of receipt of necessary regulatory permits;
the effect of commodity and financial derivative arrangements;
our ability to maintain adequate financial liquidity and to access adequate levels of capital on reasonable terms;
the occurrence of unusual weather or operating conditions, including force majeure events;
our ability to retain or attract senior management and key technical employees;
counterparty risk related to their ability to meet their future obligations;
compliance with and changes in governmental regulations or enforcement practices, especially with respect to environmental, health and safety matters;
uncertainties relating to general domestic and international economic and political conditions; and
other factors set forth in our periodic filings with the Securities and Exchange Commission, including the risks set forth in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2013.
Additional information concerning these and other factors can be found in our press releases and public periodic filings with the Securities and Exchange Commission. Many of the factors that will determine our future results are beyond the ability of management to control or predict. Readers should not place undue reliance on forward-looking statements, which reflect management’s views only as of the date hereof. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by these cautionary statements. We undertake no obligation to revise or update any forward-looking statements, or to make any other forward-looking statements, whether as a result of new information, future events or otherwise except as may be required by applicable law.



20



Item 2
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of the financial condition and results of operations of Penn Virginia Corporation and its subsidiaries (“Penn Virginia,” the “Company,” “we,” “us” or “our”) should be read in conjunction with our Condensed Consolidated Financial Statements and Notes thereto included in Item 1. All dollar amounts presented in the tables that follow are in thousands unless otherwise indicated. Certain year-over-year changes are presented as not meaningful, or “NM,” where disclosure of the actual value does not otherwise enhance the analysis, and certain amounts for the 2013 periods have been reclassified to conform to the current year presentation. Also, due to the combination of different units of volumetric measure and the number of decimal places presented, certain results may not calculate explicitly from the values presented in the tables.

Overview of Business
We are an independent oil and gas company engaged in the exploration, development and production of oil, NGLs and natural gas in various onshore regions of the United States. Our current operations consist primarily of drilling unconventional horizontal development wells in the Eagle Ford Shale in South Texas. We also have operations in the Granite Wash in Oklahoma and the Haynesville Shale and Cotton Valley in East Texas. As of December 31, 2013, we had proved oil and gas reserves of approximately 122 million barrels of oil equivalent, or MMBOE, excluding our recently divested Selma Chalk assets in Mississippi.
The following table sets forth certain summary operating and financial statistics for the periods presented: 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2014
 
2013
 
2014
 
2013
Total production (MBOE)
2,089

 
1,807

 
5,973

 
4,982

Daily production (BOEPD)
22,706

 
19,638

 
21,881

 
18,249

Crude oil and NGL production (MBbl)
1,556

 
1,208

 
4,238

 
3,160

Crude oil and NGL production as a percent of total
74
%
 
67
%
 
71
%
 
63
%
Product revenues, as reported
$
141,860

 
$
121,648

 
$
411,441

 
$
313,606

Product revenues, as adjusted for derivatives
$
134,303

 
$
117,483

 
$
393,605

 
$
315,231

Crude oil and NGL revenues as a percent of total, as reported
91
%
 
89
%
 
88
%
 
87
%
Realized prices:
 
 
 
 
 
 
 
Crude oil ($/Bbl)
$
95.19

 
$
105.37

 
$
97.72

 
$
103.87

NGL ($/Bbl)
$
31.75

 
$
32.34

 
$
34.18

 
$
30.27

Natural gas ($/Mcf)
$
4.17

 
$
3.58

 
$
4.60

 
$
3.70

Aggregate ($/BOE)
$
67.91

 
$
67.33

 
$
68.88

 
$
62.95

Production and lifting costs ($/BOE):
 
 
 
 
 
 
 
Lease operating
$
7.32

 
$
4.68

 
$
6.38

 
$
5.00

Gathering, processing and transportation
2.34

 
1.68

 
1.91

 
1.93

Production and ad valorem taxes ($/BOE)
3.68

 
3.65

 
3.77

 
3.92

General and administrative ($/BOE) 1
5.22

 
5.85

 
5.66

 
6.64

Total operating costs ($/BOE)
$
18.56

 
$
15.86

 
$
17.72

 
$
17.49

Depreciation, depletion and amortization ($/BOE)
$
34.47

 
$
34.57

 
$
36.10

 
$
35.80

Cash provided by operating activities
$
101,257

 
$
95,083

 
$
200,450

 
$
224,834

Cash paid for capital expenditures
$
194,451

 
$
127,645

 
$
545,031

 
$
356,964

Cash and cash equivalents at end of period
 
 
 
 
$
123,690

 
$
38,321

Debt outstanding at end of period
 
 
 
 
$
1,075,000

 
$
1,203,000

Credit available under revolving credit facility at end of period 2
 
 
 
 
$
435,846

 
$
218,968

Net development wells drilled
15.4

 
8.9

 
44.2

 
28.2

_______________________
1 Excludes equity-classified share-based compensation, which is a non-cash expense, of $0.47 and $0.44 for the three and nine months ended September 30, 2014 and $0.56 and $0.96 for the three and nine months ended September 30, 2013 and liability-classified share-based compensation of ($0.17) and $1.11 for the three and nine months ended September 30, 2014