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EX-32.2 - EXHIBIT 32.2 - PENN VIRGINIA CORPpva-20160630xex322.htm
EX-32.1 - EXHIBIT 32.1 - PENN VIRGINIA CORPpva-20160630xex321.htm
EX-31.2 - EXHIBIT 31.2 - PENN VIRGINIA CORPpva-20160630xex312.htm
EX-31.1 - EXHIBIT 31.1 - PENN VIRGINIA CORPpva-20160630xex311.htm
EX-12.1 - EXHIBIT 12.1 - PENN VIRGINIA CORPpva-20160630xex121.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 June 30, 2016 
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
o
Accelerated filer
ý
Non-accelerated filer
o
Smaller reporting company
o
 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 July 25, 2016, 88,217,880 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 June 30, 2016
 Table of Contents
Part I - Financial Information
Item
 
Page
1.
Financial Statements:
 
 
Condensed Consolidated Statements of Operations for the Periods Ended June 30, 2016 and 2015
 
Condensed Consolidated Statements of Comprehensive Income for the Periods Ended June 30, 2016 and 2015
 
Condensed Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015
 
Condensed Consolidated Statements of Cash Flows for the Periods Ended June 30, 2016 and 2015
 
Notes to Condensed Consolidated Financial Statements:
 
 
1. Nature of Operations
 
2. Basis of Presentation
 
3. Chapter 11 Proceedings
 
4. Acquisitions and Divestitures
 
5. Accounts Receivable and Major Customers
 
6. Derivative Instruments
 
7. Property and Equipment
 
8. Debt Obligations
 
9. Income Taxes
 
10. Exit Activities
 
11. Additional Balance Sheet Detail
 
12. Fair Value Measurements
 
13. Commitments and Contingencies
 
14. Shareholders’ Equity
 
15. Share-Based Compensation and Other Benefit Plans
 
16. Interest Expense
 
17. 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
 
Financial Condition
 
Results of Operations
 
Critical Accounting Estimates
3.
Quantitative and Qualitative Disclosures About Market Risk
4.
Controls and Procedures
Part II - Other Information
1.
Legal Proceedings
1A.
Risk Factors
 
6.
Exhibits
Signatures




Part I. FINANCIAL INFORMATION
Item 1.
Financial Statements
PENN VIRGINIA CORPORATION AND SUBSIDIARIES
DEBTOR-IN-POSSESSION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS unaudited
(in thousands, except per share data) 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Revenues
 
 
 
 
 
 
 
Crude oil
$
32,019

 
$
70,672

 
$
57,985

 
$
129,840

Natural gas liquids (NGLs)
2,431

 
5,191

 
4,384

 
10,587

Natural gas
1,917

 
7,260

 
4,319

 
15,831

Gain (loss) on sales of property and equipment, net
910

 
66

 
757

 
(25
)
Other, net
(125
)
 
427

 
204

 
1,910

Total revenues
37,152

 
83,616

 
67,649

 
158,143

Operating expenses
 
 
 
 
 
 
 
Lease operating
5,225

 
10,907

 
11,417

 
22,476

Gathering, processing and transportation
4,650

 
6,383

 
8,468

 
13,881

Production and ad valorem taxes
2,163

 
4,967

 
2,916

 
9,656

General and administrative
9,662

 
11,479

 
26,764

 
23,449

Exploration
4,320

 
4,362

 
5,647

 
10,249

Depreciation, depletion and amortization
11,746

 
85,416

 
25,558

 
176,206

Impairments

 
1,084

 

 
1,084

Total operating expenses
37,766

 
124,598

 
80,770

 
257,001

Operating loss
(614
)
 
(40,982
)
 
(13,121
)
 
(98,858
)
Other income (expense)
 
 
 
 
 
 
 
Interest expense
(32,221
)
 
(23,023
)
 
(56,655
)
 
(45,036
)
Derivatives
(21,759
)
 
(15,495
)
 
(17,267
)
 
7,372

Other
(6
)
 
(540
)
 
(1,030
)
 
(542
)
Reorganization items, net
(7,380
)
 

 
(7,380
)
 

Loss before income taxes
(61,980
)
 
(80,040
)
 
(95,453
)
 
(137,064
)
Income tax expense

 
(89
)
 

 
(230
)
Net loss
(61,980
)
 
(80,129
)
 
(95,453
)
 
(137,294
)
Preferred stock dividends
(2,820
)
 
(6,067
)
 
(5,972
)
 
(12,134
)
Net loss attributable to common shareholders
$
(64,800
)
 
$
(86,196
)
 
$
(101,425
)
 
$
(149,428
)
Net loss per share:
 
 
 
 
 
 
 
Basic
$
(0.73
)
 
$
(1.19
)
 
$
(1.16
)
 
$
(2.07
)
Diluted
$
(0.73
)
 
$
(1.19
)
 
$
(1.16
)
 
$
(2.07
)
 
 
 
 
 
 
 
 
Weighted average shares outstanding – basic
89,051

 
72,398

 
87,496

 
72,330

Weighted average shares outstanding – diluted
89,051

 
72,398

 
87,496

 
72,330


See accompanying notes to condensed consolidated financial statements.

3



PENN VIRGINIA CORPORATION AND SUBSIDIARIES 
DEBTOR-IN-POSSESSION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME unaudited
(in thousands) 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Net loss
$
(61,980
)
 
$
(80,129
)
 
$
(95,453
)
 
$
(137,294
)
Other comprehensive loss:
 

 
 

 
 
 
 
Change in pension and postretirement obligations, net of tax of $(5) and $(11) in 2015
(11
)
 
(10
)
 
(38
)
 
(21
)
 
(11
)
 
(10
)
 
(38
)
 
(21
)
Comprehensive loss
$
(61,991
)
 
$
(80,139
)
 
$
(95,491
)
 
$
(137,315
)
 
See accompanying notes to condensed consolidated financial statements.

4



PENN VIRGINIA CORPORATION AND SUBSIDIARIES
DEBTOR-IN-POSSESSION
CONDENSED CONSOLIDATED BALANCE SHEETS unaudited
(in thousands, except share data)
 
As of
 
June 30,
 
December 31,
 
2016
 
2015
Assets
 

 
 

Current assets
 

 
 

Cash and cash equivalents
$
38,997

 
$
11,955

Accounts receivable, net of allowance for doubtful accounts
40,314

 
47,965

Derivative assets

 
97,956

Other current assets
4,939

 
7,104

Total current assets
84,250

 
164,980

Property and equipment, net (successful efforts method)
321,132

 
344,395

Other assets
6,740

 
8,350

Total assets
$
412,122

 
$
517,725

 
 
 
 
Liabilities and Shareholders’ Deficit
 

 
 

Current liabilities
 

 
 

Accounts payable and accrued liabilities
$
53,160

 
$
103,525

Derivative liabilities
4,527

 

Debt obligations, net of unamortized issuance costs
112,553

 
1,224,383

Total current liabilities
170,240

 
1,327,908

Other liabilities
84,346

 
104,938

Derivative liabilities
13,715

 

Liabilities subject to compromise
1,158,355

 

 
 
 
 
Commitments and contingencies (Note 13)


 


 
 
 
 
Shareholders’ deficit:
 

 
 

Preferred stock of $100 par value – 100,000 shares authorized; Series A – 3,864 and 3,915 shares issued as of June 30, 2016 and December 31, 2015, respectively, and Series B – 14,933 and 27,551 issued as of June 30, 2016 and December 31, 2015, each with a redemption value of $10,000 per share
1,880

 
3,146

Common stock of $0.01 par value – 228,000,000 shares authorized; 88,217,880 and 81,252,676 shares issued as of June 30, 2016 and December 31, 2015, respectively
697

 
628

Paid-in capital
1,208,363

 
1,211,088

Accumulated deficit
(2,225,724
)
 
(2,130,271
)
Deferred compensation obligation
3,440

 
3,440

Accumulated other comprehensive income
384

 
422

Treasury stock – 455,689 and 455,689 shares of common stock, at cost, as of June 30, 2016 and December 31, 2015, respectively
(3,574
)
 
(3,574
)
Total shareholders’ deficit
(1,014,534
)
 
(915,121
)
Total liabilities and shareholders’ deficit
$
412,122

 
$
517,725


See accompanying notes to condensed consolidated financial statements.

5



PENN VIRGINIA CORPORATION AND SUBSIDIARIES
DEBTOR-IN-POSSESSION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS unaudited
(in thousands)
 
Six Months Ended
 
June 30,
 
2016
 
2015
Cash flows from operating activities
 

 
 

Net loss
$
(95,453
)
 
$
(137,294
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 

 
 

Depreciation, depletion and amortization
25,558

 
176,206

Impairments

 
1,084

Accretion of firm transportation obligation
317

 
445

Derivative contracts:
 
 
 
Net losses (gains)
17,267

 
(7,372
)
Cash settlements, net
46,952

 
72,332

Deferred income tax expense

 
230

(Gain) loss on sales of assets, net
(757
)
 
25

Non-cash exploration expense
1,713

 
4,005

Non-cash interest expense
22,189

 
2,280

Share-based compensation (equity-classified)
(3,922
)
 
2,106

Other, net
(13
)
 
3

Changes in operating assets and liabilities, net
31,922

 
(15,769
)
Net cash provided by operating activities
45,773

 
98,281

 
 
 
 
Cash flows from investing activities
 

 
 

Capital expenditures – property and equipment
(14,575
)
 
(263,993
)
Proceeds from sales of assets, net
126

 
(221
)
Other, net
1,186

 

Net cash used in investing activities
(13,263
)
 
(264,214
)
 
 
 
 
Cash flows from financing activities
 

 
 

Proceeds from revolving credit facility borrowings

 
197,000

Repayment of revolving credit facility borrowings
(5,468
)
 
(20,000
)
Debt issuance costs paid

 
(744
)
Dividends paid on preferred stock

 
(12,134
)
Net cash (used in) provided by financing activities
(5,468
)
 
164,122

Net increase (decrease) in cash and cash equivalents
27,042

 
(1,811
)
Cash and cash equivalents – beginning of period
11,955

 
6,252

Cash and cash equivalents – end of period
$
38,997

 
$
4,441

 
 
 
 
Supplemental disclosures:
 

 
 

Cash paid for:
 

 
 

Interest
$
2,947

 
$
46,041

Income taxes paid (refunds received)
$
(35
)
 
$
7

Non-cash investing and financing activities:
 
 
 
Changes in accrued liabilities related to capital expenditures
$
(10,555
)
 
$
(20,570
)
Derivatives settled to reduce outstanding debt
$
51,979

 
$

 
See accompanying notes to condensed consolidated financial statements.

6



PENN VIRGINIA CORPORATION AND SUBSIDIARIES
DEBTOR-IN-POSSESSION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS unaudited
For the Quarterly Period Ended June 30, 2016
(in thousands, except per share amounts)

1. 
Nature of Operations
Penn Virginia Corporation (together with its consolidated subsidiaries, unless the context otherwise requires, “Penn Virginia,” the “Company,” “we,” “us” or “our”) is an independent oil and gas company engaged in the onshore exploration, development and production of oil, natural gas liquids (“NGLs”) and natural gas. Our current operations consist primarily of operating our producing wells in the Eagle Ford Shale (the “Eagle Ford”) in South Texas. Our operations are substantially concentrated with over 90 percent of our production, revenues and capital expenditures being attributable to this region. We also have less significant operations in Oklahoma, primarily in the Granite Wash.

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, 2015. Operating results for the six months ended June 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. Certain amounts for the corresponding 2015 periods have been reclassified to conform to the current year presentation. These reclassifications have no impact on our previously reported results of operations, balance sheets or cash flows.
Going Concern Presumption
Our unaudited Condensed Consolidated Financial Statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and other commitments in the normal course of business. As discussed in further detail in Note 3 below, we have been operating as a “debtor-in-possession” since May 12, 2016.
There are certain inherent risks associated with our ongoing bankruptcy proceedings. Accordingly, there can be no assurance that we will emerge from bankruptcy as a “going concern.” Furthermore, the realization of our assets and satisfaction of our liabilities and other commitments, without substantial adjustments, as well as a change in ownership, are also subject to significant uncertainty.
We have applied the relevant guidance provided in U.S. GAAP with respect to the accounting and financial statement disclosures for entities that have filed petitions with the bankruptcy court and expect to reorganize as going concerns in preparing our Condensed Consolidated Financial Statements and Notes. That guidance requires that, for periods subsequent to our bankruptcy filing on May 12, 2016, or post-petition periods, certain transactions and events that are directly related to our ongoing reorganization be distinguished from our normal business operations. Accordingly, certain revenues, expenses, realized gains and losses and provisions that are realized or incurred in the bankruptcy proceedings are included in “Reorganization items, net” on our Condensed Consolidated Statement of Operations for the periods ended June 30, 2016. In addition, certain liabilities and other obligations incurred prior to May 12, 2016, or pre-petition periods, have been classified in “Liabilities subject to compromise” on our Condensed Consolidated Balance Sheet as of June 30, 2016. These liabilities have been reported at estimated amounts that we believe will be allowed as claims by the bankruptcy court; however, they may ultimately be settled for lesser or greater amounts. Further detail for our “Reorganization items, net” and “Liabilities subject to compromise” are provided in Note 3 below.
New Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2016–13, Measurement of Credit Losses on Financial Instruments (“ASU 2016–13”), which changes the recognition model for the impairment of financial instruments, including accounts receivable, loans and held-to-maturity debt securities, among others. ASU 2016–13 is required to be adopted using the modified retrospective method by January 1, 2020, with early adoption permitted. ASU 2016–13 will have applicability to our accounts receivable portfolio, particularly those receivables attributable to our joint interest partners. At this time, we do not anticipate that the adoption of ASU 2016–13 will have a significant impact on our Consolidated Financial Statements and related disclosures; however, we are currently in the early stages of evaluating the requirements and the period for which we will adopt the standard.

7



In March 2016, the FASB issued ASU 2016–09, Improvements to Employee Share-based Payment Accounting (“ASU 2016–09”), which simplifies the accounting for share-based compensation. The areas for simplification that are applicable to publicly held companies are as follows: (i) Accounting for Income Taxes, (ii) Classification of Excess Tax Benefits on the Statement of Cash Flows, (iii) Forfeitures, (iv) Minimum Statutory Tax Withholding Requirements and (v) Classification of Employee Taxes Paid on the Statement of Cash Flows when an employer withholds shares for tax-withholding purposes. The effective date of ASU 2016–09 is January 1, 2017, with early adoption permitted. As discussed in detail in Notes 3 and 15 below, our reorganization plans anticipate that all of our existing share-based compensation plans will be canceled. Accordingly, we are currently planning to adopt ASU 2016–09 upon our emergence from bankruptcy which is anticipated in the third quarter of 2016.
In February 2016, the FASB issued ASU 2016–02, Leases (“ASU 2016–02”), which will require organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases with terms of more than twelve months. Consistent with current U.S. GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. ASU 2016–02 also will require disclosures regarding the amount, timing, and uncertainty of cash flows arising from leases. The effective date of ASU 2016–02 is January 1, 2019, with early adoption permitted. We are continuing to evaluate the effect that ASU 2016–02 will have on our Consolidated Financial Statements and related disclosures as well as the period for which we will adopt the standard.
In May 2014, the FASB issued ASU 2014–09, Revenues 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, 2018. The standard permits the use of either the retrospective or cumulative effect transition method upon adoption. While traditional commodity sales transactions, property conveyances and joint interest arrangements in the oil and gas industry are not expected to be significantly impacted by ASU 2014–09, natural gas imbalances and other non-product revenues, including our ancillary marketing, gathering and transportation and water service revenues could be affected. Accordingly, we are continuing to evaluate the effect that ASU 2014–09 will have on our Consolidated Financial Statements and related disclosures, with a more focused analysis on these other revenue sources. We have not yet selected a transition method nor have we determined the period for which we will adopt the new standard.
Subsequent Events
Management has evaluated all of our activities through the issuance date of our Condensed Consolidated Financial Statements and has concluded that no subsequent events have occurred that would require recognition in our Condensed Consolidated Financial Statements or disclosure in the Notes thereto.

3.
Chapter 11 Proceedings
On May 12, 2016 (the “Petition Date”), we and eight of our subsidiaries including Penn Virginia Holding Corp.; Penn Virginia MC Corporation; Penn Virginia MC Energy L.L.C.; Penn Virginia MC Operating Company L.L.C.; Penn Virginia Oil & Gas Corporation; Penn Virginia Oil & Gas GP LLC; Penn Virginia Oil & Gas LP LLC; and Penn Virginia Oil & Gas, L.P. (collectively the “Chapter 11 Subsidiaries”) filed voluntary petitions (In re Penn Virginia Corporation, et al, Case No. 16-32395) seeking relief under Chapter 11 of Title 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Eastern District of Virginia (the “Bankruptcy Court”). Prior to the Petition Date we had engaged Kirkland & Ellis LLP (“K&E”), Jefferies LLC (“Jefferies”) and Alvarez and Marsal North America, LLC (“A&M”) and appointed R. Seth Bullock, Managing Director at A&M, to act as our Chief Restructuring Officer in our efforts to restructure and evaluate various strategic alternatives. In connection with our bankruptcy proceedings, we have continued our engagements with these professional service firms.
Debtors-In-Possession. We and the Chapter 11 Subsidiaries are currently operating our business as debtors-in-possession in accordance with the applicable provisions of the Bankruptcy Code. The Bankruptcy Court has granted all “first day” motions filed by us and the Chapter 11 Subsidiaries, which were designed primarily to minimize the impact of the Chapter 11 proceedings on our normal day-to-day operations, our customers, regulatory agencies, including taxing authorities, and employees. As a result, we are not only able to conduct normal business activities and pay all associated obligations for the post-petition period, we are also authorized to pay and have paid (subject to limitations applicable to payments of certain pre-petition obligations) pre-petition employee wages and benefits, pre-petition amounts owed to certain lienholders, amounts due to taxing authorities for production and other related taxes and funds belonging to third parties, including royalty and working interest holders. During the pendency of the Chapter 11 case, all transactions outside the ordinary course of our business require the prior approval of the Bankruptcy Court.

8



Automatic Stay. Subject to certain specific exceptions under the Bankruptcy Code, the Chapter 11 filings automatically stayed most judicial or administrative actions against us and the Chapter 11 Subsidiaries as well as efforts by creditors to collect on or otherwise exercise rights or remedies with respect to pre-petition claims. As a result, for example, most creditor actions to obtain possession of property from us or any of the Chapter 11 Subsidiaries, or to create, perfect or enforce any lien against our property or any of the Chapter 11 Subsidiaries, or to collect on or otherwise exercise rights or remedies with respect to a pre-petition claim are stayed.         
Restructuring Support Agreement. Immediately prior to the Petition Date, the holders (the “Ad Hoc Committee”) of approximately 86 percent of the $1,075 million principal amount of our 7.25% Senior Notes due 2019 (the “2019 Senior Notes”) and 8.50% Senior Notes due 2020 (the “2020 Senior Notes” and, together with the 2019 Senior Notes, the “Senior Notes”) agreed, pursuant to a restructuring support agreement (the “RSA”), to support a plan under which all of our Senior Notes are converted to equity in the reorganized company. Under the RSA, holders of the Senior Notes and certain unsecured creditors are to receive their pro rata share of 100 percent of the reorganized company’s common stock (“New Common Stock”) in exchange for their claims, subject only to dilution as a result of a proposed new management incentive program, any fees payable in New Common Stock under the terms of the Backstop Commitment Agreement (see “Backstop Commitment Agreement” below) and New Common Stock issued in the Rights Offering (see “Rights Offering” below). The RSA includes an agreed timeline for the Chapter 11 proceedings that, if met, would result in our emergence from bankruptcy during the third quarter of 2016.
Creditors Committee. On May 25, 2016, the United States Trustee for the Eastern District of Virginia (the “U.S. Trustee”) appointed the Official Committee of Unsecured Claimholders (the “UCC”) pursuant to section 1102 of the Bankruptcy Code. In addition to professional fees and other costs incurred that are attributable to the services provided by K&E, Jefferies, A&M and other representatives, we are responsible for the reasonable costs, as approved by the Bankruptcy Court, incurred by the UCC, the Ad Hoc Committee and the holders (the “RBL Lenders”) of 100 percent of the claims attributable to our pre-petition revolving credit agreement (as amended, the “RBL”), during the course of the Chapter 11 proceedings. These post-petition costs, as well as administrative fees charged by the U.S. Trustee, have been reported in “Reorganization items, net” in our Condensed Consolidated Statement of Operations as described above. Similar costs that were incurred during the pre-petition periods have been reported in “General and administrative” expenses.
Ad Hoc Equity Committee. In June 2016, a group of holders of approximately 3 percent of our common stock (the “Ad Hoc Equity Holders”) filed a motion with the U.S. Trustee requesting that the U.S. Trustee appoint an official committee of equity holders, which the U.S. Trustee denied. Subsequently, in July 2016, the Ad Hoc Equity Holders filed with the Bankruptcy Court, among other motions, a motion requesting that the Bankruptcy Court appoint an official committee of equity holders. A hearing on this motion is scheduled for August 4, 2016.
Plan of Reorganization. On June 28, 2016, we and the Chapter 11 Subsidiaries filed with the Bankruptcy Court the First Amended Joint Chapter 11 Plan of Reorganization of Penn Virginia Corporation and its Debtor Affiliates (the “Plan”), as well as the Disclosure Statement for the First Amended Joint Chapter 11 Plan of Penn Virginia Corporation and its Debtor Affiliates (the “Disclosure Statement”). The Bankruptcy Court has authorized us to solicit acceptances for the Plan and approved the Disclosure Statement and other related solicitation materials and procedures necessary to solicit approval or objections to the Plan. We are currently in the process of soliciting votes with respect to the Plan. The Plan is supported by us, the RBL Lenders, the Ad Hoc Committee and the UCC. A hearing to consider confirmation of the Plan is scheduled to be held on August 11, 2016 in the Bankruptcy Court (the “Confirmation Hearing”).
If the Plan is ultimately confirmed by the Bankruptcy Court, we and the Chapter 11 Subsidiaries would exit bankruptcy pursuant to the terms of the Plan. Under the Plan, the claims against and interests in us and the Chapter 11 Subsidiaries are grouped into classes based, in part, on their respective priority. The Plan provides that, upon emergence from bankruptcy:
the approximately $1,122 million of indebtedness, including accrued interest, attributable to our Senior Notes and certain other unsecured claims will be exchanged for approximately 43.4 percent of the New Common Stock;
holders of claims arising under the debtor-in-possession (“DIP”) credit facility (the “DIP Facility”) (see “Debtor-In-Possession Financing” below) will be paid in full from cash on hand and proceeds from the Exit Facility (see “Exit Facility” below) and the Rights Offering;
holders of claims arising under the RBL will be paid in full from cash on hand and proceeds from the Exit Facility and the Rights Offering;
the Ad Hoc Committee will receive a backstop fee which represents approximately 3.2 percent of the New Common Stock;
holders of the Senior Notes and Republic Midstream, LLC (“Republic Midstream”) will be entitled to participate in the Rights Offering; and
our current preferred stock and common stock will be canceled, extinguished and discharged.
The Plan also provides that the new board of directors of the reorganized company will be announced at or before the Confirmation Hearing.

9



The Plan is subject to acceptance by certain holders of claims against us and the Chapter 11 Subsidiaries and confirmation by the Bankruptcy Court. The Plan is accepted by a class of claims entitled to vote if at least one-half in number and two-thirds in dollar amount of claims actually voting in the class have voted to accept the Plan.
Under certain circumstances set forth in the Bankruptcy Code, the Bankruptcy Court may confirm a plan even if such plan has not been accepted by all impaired classes of claims and equity interests. In particular, a plan may be compelled on a rejecting class if the proponent of the plan demonstrates, among other things, that (1) no class junior to the rejecting class is receiving or retaining property under the plan and (2) no class of claims or interests senior to the rejecting class is being paid more than in full.
Executory Contracts. Subject to certain exceptions, under the Bankruptcy Code, we and the Chapter 11 Subsidiaries may assume, assign, or reject certain executory contracts and unexpired leases subject to the approval of the Bankruptcy Court and fulfillment of certain other conditions. The rejection of an executory contract or unexpired lease is generally treated as a pre-petition breach of such executory contract or unexpired lease and, subject to certain exceptions, relieves us and the Chapter 11 Subsidiaries of performing their future obligations under such executory contract or unexpired lease but may give rise to a general unsecured claim against us or the applicable Chapter 11 Subsidiaries for damages caused by such rejection. The assumption of an executory contract or unexpired lease generally requires us and the Chapter 11 Subsidiaries to cure existing monetary defaults under such executory contract or unexpired lease and provide adequate assurance of future performance. Any description of the treatment of an executory contract or unexpired lease with us or any of the Chapter 11 Subsidiaries, including any description of the obligations under any such executory contract or unexpired lease, is qualified by and subject to any rights we have with respect to executory contracts and unexpired leases under the Bankruptcy Code.
On July 21, 2016, we and the Chapter 11 Subsidiaries filed a motion (the “9019 Motion”) to approve a settlement with Republic Midstream and Republic Midstream Marketing, LLC (“Republic Marketing” and, together with Republic Midstream, collectively, “Republic”) pursuant to Rule 9019 of the Federal Rules of Bankruptcy Procedure and to authorize the assumption of certain amended agreements with Republic pursuant to section 365 of the Bankruptcy Code. As set forth in detail in the 9019 Motion, the settlement with Republic provides for the material modification of the agreements with Republic and certain claims, guarantees, and payments in favor of Republic. The hearing to consider the 9019 Motion is scheduled for August 4, 2016.
Potential Claims. We and the Chapter 11 Subsidiaries have filed with the Bankruptcy Court Schedules and Statements setting forth, among other things, our and each of the Chapter 11 Subsidiaries’ assets and liabilities. The Schedules and Statements, which are subject to the assumptions disclosed in connection therewith, may be subject to further amendment or modification. Certain holders of pre-petition claims were required to file proofs of claim by June 30, 2016 (the “Bar Date”). Certain other parties, including taxing authorities and other governmental agencies, are provided additional time beyond the Bar Date to file proofs of claim.
Claims received by the Bar Date are currently in the process of being reviewed and reconciled with our and the Chapter 11 Subsidiaries’ books and records. Differences between amounts scheduled by us and the Chapter 11 Subsidiaries and claims by creditors will be investigated and resolved in connection with the claims resolution process. In light of the expected number of creditors, the claims resolution process may take considerable time to complete and may continue after our emergence from bankruptcy. Accordingly, the ultimate number and amount of allowed claims is not presently known, nor can the ultimate recovery with respect to allowed claims be presently ascertained.
Chapter 11 Filing Impact on Creditors and Shareholders. Under the priority requirements established by the Bankruptcy Code, unless creditors agree otherwise, pre-petition liabilities to creditors and post-petition liabilities must be satisfied in full before the holders of our existing preferred stock and common stock are entitled to receive any distribution or retain any property under a plan of reorganization. The ultimate recovery to creditors, if any, will not be determined until confirmation and implementation of the Plan. The outcome of the Chapter 11 proceedings remains uncertain at this time and, as a result, we cannot accurately estimate the amounts or value of distributions that creditors may receive. We expect that our preferred stock and common stock will receive no distribution with respect to their interests.
Debtor-In-Possession Financing. In connection with the pre-petition negotiations of the RSA, certain holders of the RBL agreed to provide a DIP Facility to us and the Chapter 11 Subsidiaries pursuant to the terms of a DIP credit agreement. The DIP Facility was approved by the Bankruptcy Court and provides for a multi-draw term loan in the aggregate amount of up to $25 million. Pursuant to the Plan, any amounts outstanding under the DIP Facility will be paid in full in cash upon emergence. As of June 30, 2016, we have not drawn any amounts from the DIP Facility, and we do not expect to do so prior to emergence.

10



Backstop Commitment Agreement. On May 10, 2016, we entered into a backstop commitment agreement (the “Backstop Commitment Agreement”) with the parties thereto (collectively, the “Backstop Parties”), pursuant to which the Backstop Parties, which are holders of the Senior Notes, will provide a $50.0 million commitment to backstop the proposed Rights Offering to be conducted in connection with the Plan. Under the Backstop Commitment Agreement, we have agreed to pay the Backstop Parties, on the closing date of the transactions contemplated by the Backstop Commitment Agreement, a commitment premium equal to 6.0 percent of the Rights Offering Amount (as defined below) (the “Commitment Premium”). If the transactions contemplated by the Backstop Commitment Agreement are consummated, the Commitment Premium will be payable in shares of common stock of the reorganized company. We will also be required to pay, in cash, a termination fee equal to 4.0 percent of the Rights Offering Amount upon the occurrence of certain termination events as set forth in the Backstop Commitment Agreement. Pursuant to the Backstop Commitment Agreement, we will also be required to (A) reimburse the Backstop Parties (i) for reasonable and documented fees and expenses of counsel, consultants and a financial advisor, and any other advisors or consultants as may be reasonably determined by the holder of our Senior Notes who are party to the RSA (the “Consenting Noteholders”) and the Backstop Parties, and (ii) for filing fees, if any, required by antitrust laws and reasonable and documented expenses in connection with the transactions contemplated by the Backstop Commitment Agreement and (B) indemnify the Backstop Parties under certain circumstances for losses arising out of the Backstop Commitment Agreement, the Plan and the transactions contemplated thereby.
Rights Offering. In accordance with the Plan, the Backstop Commitment Agreement, and the proposed procedures for the conduct of the Rights Offering (the “Rights Offering Procedures”), we will offer eligible creditors, including the Backstop Parties, shares of New Common Stock of the reorganized company upon emergence from Chapter 11 for an aggregate purchase price of $50 million (the “Rights Offering Amount”). Pursuant to the Backstop Commitment Agreement, the Backstop Parties have agreed to purchase all shares of New Common Stock that are not duly subscribed for pursuant to the Rights Offering at a per share purchase price equal to $45,100,000 divided by the total number of shares of common stock of the reorganized company outstanding as of emergence (without giving effect to the common stock issued or issuable under the Rights Offering or in respect of the Commitment Premium).
The rights to purchase common stock in the Rights Offering, any shares issued upon exercise thereof, and all shares issued to the Backstop Parties pursuant to the Backstop Commitment Agreement, will be issued in reliance upon the exemption from registration under the Securities Act of 1933 (the “Securities Act”) provided by Section 4(a)(2) thereof and/or Regulation D thereunder. As a condition to the closing of the transactions contemplated by the Backstop Commitment Agreement, we will enter into a registration rights agreement with certain of the Backstop Parties entitling such Backstop Parties to request that we register their securities for sale under the Securities Act at various times.
The Backstop Commitment Agreement and Rights Offering Procedures have been filed with, and are subject to the approval of, the Bankruptcy Court. The Backstop Parties’ commitments to backstop the Rights Offering, and the other transactions contemplated by the Backstop Commitment Agreement, are conditioned upon the satisfaction of all conditions to the effectiveness of the Plan, and other applicable conditions precedent set forth in the Backstop Commitment Agreement. The issuances of common stock pursuant to the Rights Offering and the Backstop Commitment Agreement are conditioned upon, among other things, confirmation of the Plan by the Bankruptcy Court, and will be effective upon our emergence from Chapter 11.
Restrictions on Trading of Our Equity Securities to Protect Our Use of Net Operating Losses. The Bankruptcy Court has issued a final order pursuant to Sections 105(a), 362(a)(3) and 541 of the Bankruptcy Code enabling us and the Chapter 11 Subsidiaries to avoid limitations on the use of our tax net operating loss carryforwards and certain other tax attributes by imposing certain notice procedures and transfer restrictions on the trading of our equity securities. In general, the order applies to any person that, directly or indirectly, beneficially owns (or would beneficially own as a result of a proposed transfer) at least 4.50 percent of either our outstanding common stock or preferred stock (a “Substantial Stockholder”), and requires that each Substantial Stockholder file with the Bankruptcy Court and serve us with notice of such status. Under the order, prior to any proposed acquisition or disposition of equity securities that would result in an increase or decrease in the amount of our equity securities owned by a Substantial Stockholder, or that would result in a person or entity becoming a Substantial Stockholder, such person or entity is required to file with the Bankruptcy Court and notify us of such acquisition or disposition. We have the right to seek an injunction from the Bankruptcy Court to prevent certain acquisitions or sales of our common stock or preferred stock if the acquisition or sale would pose a material risk of adversely affecting our ability to utilize such tax attributes. 
Risks Associated with Chapter 11 Proceedings. For the duration of our Chapter 11 proceedings, our operations and our ability to develop and execute our business plan are subject to the risks and uncertainties associated with the Chapter 11 process as described in Part II, Item 1A, “Risk Factors” of this Quarterly Report on Form 10-Q. Because of these risks and uncertainties, the description of our operations, properties and capital plans may not accurately reflect our operations, properties and capital plans following the Chapter 11 process.

11



Liabilities Subject to Compromise. As described above in Note 2, our Condensed Consolidated Balance Sheet as of June 30, 2016 includes “Liabilities subject to compromise,” which represent liabilities that we anticipate will be allowed as claims in our bankruptcy case. These amounts include amounts related to the anticipated rejection of various executory contracts and unexpired leases. Additional amounts may be included in “Liabilities subject to compromise” in future periods if additional executory contracts and unexpired leases are rejected. Conversely, to the extent that such executory contracts or unexpired leases are not rejected and are instead assumed, certain liabilities characterized as subject to compromise may be converted to post-petition liabilities. Because the nature of many of the potential claims has not yet been finally determined at this time, the magnitude of such claims is not reasonably estimable at this time. Such claims or changes in claims may be material.
Differences between liabilities we have included in “Liabilities subject to compromise” on our Condensed Consolidated Balance Sheet as of June 30, 2016 and the claims filed by the Bar Date, or to be filed subsequently, will be investigated and resolved in connection with the claims resolution process. We will continue to evaluate these liabilities throughout the Chapter 11 proceedings and adjust amounts as necessary. Such adjustments may be material.
The following table summarizes the components of “Liabilities subject to compromise” included on our Consolidated Balance Sheet as of June 30, 2016 (in thousands):
Senior Notes
 
$
1,075,000

Interest on Senior Notes
 
47,213

Firm transportation obligation
 
12,719

Compensation – related
 
9,733

Deferred compensation
 
4,605

Defined benefit pension obligations
 
1,221

Postretirement health care benefit obligations
 
883

Trade accounts payable
 
1,892

Litigation claims
 
1,092

Other accrued liabilities
 
3,997

 
 
$
1,158,355

Reorganization Items. As described above in Note 2, our Condensed Consolidated Statements of Operations for the periods ended June 30, 2016 includes “Reorganization items, net,” which reflects costs associated with the Chapter 11 proceedings, principally professional fees, and the costs associated with the DIP Facility. In future periods and in connection with the claims resolution process, we anticipate recording adjustments to “Liabilities subject to compromise” which will be included as a component of “Reorganization items, net,” as necessary.
The following table summarizes the components included in “Reorganization items, net” in our Condensed Consolidated Statements of Operations for the periods ended June 30, 2016 (in thousands):
Legal and professional fees and expenses
 
$
7,237

DIP Facility costs and commitment fees
 
143

Adjustments to pre-petition liabilities
 

 
 
$
7,380


4.
Acquisitions and Divestitures 
Acquisitions 
Undeveloped Eagle Ford Acreage
In August 2014, we acquired undeveloped acreage in the Eagle Ford in Lavaca County, Texas for a purchase price of $45.6 million, of which $34.9 million was paid at closing and the balance of $10.7 million was to be paid over three years as a drilling carry. We recorded $2.0 million under the drilling carry commitment in June 2016 as a component of exploration expense; however, the corresponding obligation has been included in “Liabilities subject to compromise” on our Consolidated Balance Sheet as of June 30, 2016.

12



Divestitures 
South Texas Oil Gathering System Construction Rights and Natural Gas Gathering and Gas Lift Assets
In July 2014, we sold the rights to construct a crude oil gathering and intermediate transportation system in South Texas to Republic Midstream and in January 2014, we sold our South Texas natural gas gathering and gas lift assets to American Midstream Partners, LP (“AMID”). Concurrent with these sales, we entered into long-term agreements with Republic Midstream and AMID to provide us crude oil gathering and intermediate transportation services and natural gas gathering, compression and gas lift services, respectively, for a substantial portion of our future South Texas production. We realized significant gains and recognized a substantial portion thereof upon the closing of these transactions in 2014. With respect to the Republic Midstream transaction, $75.7 million of the total gain was deferred and is being recognized over a twenty-five year period which began in March 2016. We amortized $0.9 million of the deferred gain during the six months ended June 30, 2016. As of June 30, 2016, $3.0 million of the remaining deferred gain is included as a component of “Accounts payable and accrued liabilities” and $71.8 million, representing the remaining noncurrent portion, is included as a component of “Other liabilities” on our Condensed Consolidated Balance Sheets. With respect to the AMID transaction, $10.6 million of the total gain was deferred and is being recognized over a twenty-five year period which began in January 2014. We amortized $0.2 million of the deferred gain during each of the six months ended June 30, 2016 and 2015. As of June 30, 2016, $0.4 million of the remaining deferred gain was included as a component of “Accounts payable and accrued liabilities” and $9.1 million, representing the noncurrent portion, was included as a component of “Other liabilities” on our Condensed Consolidated Balance Sheets.

5.       Accounts Receivable and Major Customers
The following table summarizes our accounts receivable by type as of the dates presented:
 
As of
 
June 30,
 
December 31,
 
2016
 
2015
Customers
$
22,573

 
$
23,481

Joint interest partners
12,849

 
18,381

Other
6,510

 
7,658

 
41,932

 
49,520

Less: Allowance for doubtful accounts
(1,618
)
 
(1,555
)
 
$
40,314

 
$
47,965

For the six months ended June 30, 2016, three customers accounted for $62.2 million, or approximately 93%, of our consolidated product revenues. The revenues generated from these customers during the six months ended June 30, 2016 were $32.1 million, $16.2 million and $13.9 million or 48%, 24% and 21% of the consolidated total, respectively. As of June 30, 2016, $20.5 million, or approximately 91%, of our consolidated accounts receivable from customers was related to these customers. For the six months ended June 30, 2015, three customers accounted for $96.7 million, or approximately 62%, of our consolidated product revenues. The revenues generated from these customers during the six months ended June 30, 2015 were $41.2 million, $36.1 million, and $19.4 million, or approximately 26%, 23% and 13% of the consolidated total, respectively. As of December 31, 2015, $21.1 million, or approximately 90%, 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.

6.
Derivative Instruments
We utilize derivative instruments to mitigate our financial exposure to crude oil and natural gas price volatility. Our derivative instruments are not formally designated as hedges in the context of U.S. GAAP.
Commodity Derivatives
We typically utilize collars and swaps, 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.

13



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.
We terminated all of our pre-petition derivative contracts for $22.9 million, $22.6 million and $17.5 million and reduced our amounts outstanding under the RBL by $22.9 million, $16.6 million and $12.5 million in March 2016, April 2016 and May 2016, respectively. In connection with these transactions, the counterparties to the derivative contracts, which are also affiliates of lenders under the RBL, transferred the cash proceeds that were used for RBL repayments directly to the administrative agent under the RBL. Accordingly, all of these RBL repayments have been presented as non-cash financing activities on our Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2016.
On May 13, 2016, the Bankruptcy Court approved our motion to enter into new commodity derivative contracts. Accordingly, we hedged a substantial portion of our future crude oil production through the end of 2019, as required in the RSA, at a weighted-average price of approximately $48.62 per barrel.
The following table sets forth our commodity derivative positions as of June 30, 2016:
 
 
 
Average
 
 
 
 
 
 
 
 
 
Volume Per
 
Weighted Average Price
 
Fair Value
 
Instrument
 
Day
 
Floor/Swap
 
Ceiling
 
Asset
 
Liability
Crude Oil:
 
 
(barrels)
 
($/barrel)
 
 
 
 
Third quarter 2016
Swaps
 
5,940

 
$
47.69

 
 
 
$

 
$
807

Fourth quarter 2016
Swaps
 
5,940

 
$
47.69

 
 
 

 
1,628

First quarter 2017
Swaps
 
4,408

 
$
48.62

 
 
 

 
1,178

Second quarter 2017
Swaps
 
4,408

 
$
48.62

 
 
 

 
1,390

Third quarter 2017
Swaps
 
4,408

 
$
48.62

 
 
 

 
1,551

Fourth quarter 2017
Swaps
 
4,408

 
$
48.62

 
 
 

 
1,721

First quarter 2018
Swaps
 
3,476

 
$
49.12

 
 
 

 
1,252

Second quarter 2018
Swaps
 
3,476

 
$
49.12

 
 
 

 
1,329

Third quarter 2018
Swaps
 
3,476

 
$
49.12

 
 
 

 
1,410

Fourth quarter 2018
Swaps
 
3,476

 
$
49.12

 
 
 

 
1,485

First quarter 2019
Swaps
 
2,916

 
$
49.90

 
 
 

 
1,056

Second quarter 2019
Swaps
 
2,916

 
$
49.90

 
 
 

 
1,098

Third quarter 2019
Swaps
 
2,916

 
$
49.90

 
 
 

 
1,142

Fourth quarter 2019
Swaps
 
2,916

 
$
49.90

 
 
 

 
1,195

Financial Statement Impact of Derivatives
The impact of our derivative activities on income is included in “Derivatives” on our Condensed Consolidated Statements of Operations. The following table summarizes the effects of our derivative activities for the periods presented:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Cash settlements and gains (losses):
 
 
 
 
 
 
 
Cash received for:
 
 
 
 
 
 
 
Commodity contract settlements
$
16,393

 
$
34,840

 
$
46,952

 
$
72,332

Losses attributable to:
 
 
 
 
 
 
 
Commodity contracts
(38,152
)
 
(50,335
)
 
(64,219
)
 
(64,960
)
 
$
(21,759
)
 
$
(15,495
)
 
$
(17,267
)
 
$
7,372

The effects of derivative gains and (losses) and cash settlements (except for those cash settlements attributable to the aforementioned termination transactions) are reported as adjustments to reconcile net income (loss) to net cash provided by operating activities. These items are recorded in “Derivative contracts” on our Condensed Consolidated Statements of Cash Flows under “Net losses (gains)” and “Cash settlements, net”.

14



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
 
 
 
June 30, 2016
 
December 31, 2015
 
 
 
Derivative
 
Derivative
 
Derivative
 
Derivative
Type
 
Balance Sheet Location
Assets
 
Liabilities
 
Assets
 
Liabilities
Commodity contracts
 
Derivative assets/liabilities – current
$

 
$
4,527

 
$
97,956

 
$

Commodity contracts
 
Derivative assets/liabilities - noncurrent
$

 
$
13,715

 
$

 
$

As of June 30, 2016, we reported a commodity derivative liability of $18.2 million. The contracts associated with this position are with three counterparties, all of which are investment grade financial institutions. 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.
7.
Property and Equipment
The following table summarizes our property and equipment as of the dates presented: 
 
As of
 
June 30,
 
December 31,
 
2016
 
2015
Oil and gas properties:
 

 
 

Proved
$
2,682,106

 
$
2,678,415

Unproved
5,185

 
6,881

Total oil and gas properties
2,687,291

 
2,685,296

Other property and equipment
31,555

 
31,365

Total properties and equipment
2,718,846

 
2,716,661

Accumulated depreciation, depletion and amortization
(2,397,714
)
 
(2,372,266
)
 
$
321,132

 
$
344,395


8.
Debt Obligations
The following table summarizes our debt obligations as of the dates presented:
 
As of
 
June 30, 2016
 
December 31, 2015
 
Principal
 
Unamortized Issuance Costs 1
 
Principal
 
Unamortized Issuance Costs
Revolving credit facility 2
$
112,553

 
 
 
$
170,000

 
 
Senior notes due 2019
300,000

 
$

 
300,000

 
$
3,295

Senior notes due 2020
775,000

 

 
775,000

 
17,322

Totals
1,187,553

 
$

 
1,245,000

 
$
20,617

Less: Unamortized issuance costs

 
 
 
(20,617
)
 
 
Less: Reclassified to Liabilities subject to compromise
(1,075,000
)
 
 
 

 
 
Debt obligations, net of unamortized issuance costs
$
112,553

 
 
 
$
1,224,383

 
 
____________________
1 Issuance costs attributable to the Senior Notes were subject to an accelerated write-off in advance of our bankruptcy filing during the three months ended June 30, 2016.
2 Issuance costs attributable to the RBL, which represent costs attributable to the access to credit over the RBL’s contractual term, were presented as a component of Other assets (see Note 11) prior to the accelerated write-off in advance of our bankruptcy filing during the three months ended June 30, 2016.

15



Revolving Credit Facility
In January 2016, the RBL was amended to (i) allow us to convert to or continue LIBOR loans without having to make a solvency representation and (ii) increase our mortgage requirement from 80 percent to 100 percent (subject to certain exceptions) of our proved reserves. On March 15, 2016, we entered into the Eleventh Amendment (the “Eleventh Amendment”) to the RBL, which provided (i) for an extension before certain events of default under the RBL would occur, (ii) for an initial reduction in commitments and (iii) that the borrowing base under the RBL was not subject to scheduled redetermination until May 15, 2016. Specifically, the extension period with respect to events of default was through 12:01 am on April 12, 2016, which was further extended through 12:01 am on May 10, 2016, as certain conditions were satisfied. The key conditions to the first extension (to April 12, 2016) and entry into the Eleventh Amendment were: (i) termination of certain hedge agreements and application of the proceeds against the loans (which resulted in a further reduction in our lenders’ commitments), (ii) entry into control agreements over deposit accounts, subject to customary exceptions, (iii) payment of adviser fees and (iv) agreement to certain changes to the RBL, including increasing the interest rate by 1.00%, tightening certain restrictive covenants and agreeing that monthly hedge settlements would be applied against the loans. The key conditions to the second extension (to May 10, 2016) were: (i) termination of certain additional hedges and application of a portion of the proceeds against the loans (which resulted in a further reduction in our lenders’ commitments) and (ii) no notification by the representative of the Ad Hoc Committee that they did not support such extension.
In connection with the Eleventh Amendment and second extension, we terminated certain derivative contracts representing hedges and proceeds of $22.9 million and $16.6 million were applied to reduce the amounts outstanding under the RBL in March 2016 and April 2016, respectively. We also made an optional payment on the RBL in April 2016 in the amount of $5.4 million. Finally, we terminated our remaining pre-petition derivative contracts in May 2016 immediately prior to our bankruptcy filing and proceeds of $12.5 million were applied to reduce the amounts outstanding under the RBL to the amount currently outstanding.
Borrowings under the RBL bear interest 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 2.500% to 3.500%) 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% (clauses (a), (b) and (c) (the “Base Rate”)), and, in each case, plus an applicable margin (ranging from 1.500% to 2.500%). The applicable margin is determined based on the ratio of our outstanding borrowings to the available RBL capacity. As of June 30, 2016, the actual interest rate on the outstanding borrowings under the RBL was 6.000% which is derived from a base rate of 3.500% plus an applicable margin of 2.500%.
The RBL is guaranteed by us and all of our material subsidiaries (the “Guarantor Subsidiaries”). The obligations under the RBL 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 RBL includes current ratio, leverage ratio and credit exposure financial covenants. As of June 30, 2016, and through the date upon which the Condensed Consolidated Financial Statements were issued, we were not in compliance with the current ratio covenant or the leverage ratio covenant under the RBL. The amounts outstanding under the RBL have been reclassified to current at December 31, 2015, and remain as such as of June 30, 2016.
As of June 30, 2016, the commitments under the RBL were $114.4 million, which is equal to our currently outstanding loans ($112.6 million) and issued letters of credit ($1.9 million). The commencement of the Chapter 11 case on May 12, 2016 constituted an event of default that accelerated our obligations under the RBL. Additionally, other events of defaults existed as of May 12, 2016 as a result of our failure to comply with certain of our financial covenants under the RBL as discussed above. Because of these defaults and our lack of available commitment capacity, we were unable to draw on the RBL as of June 30, 2016 and currently. We continue to accrue and pay interest on the RBL during the pendency of the bankruptcy proceedings.
2019 Senior Notes
Our 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. The 2019 Senior Notes are senior to our existing and future subordinated indebtedness and are effectively subordinated to our secured indebtedness, including the RBL, 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. Our bankruptcy filing represented an event of default under the indenture governing the 2019 Senior Notes. The 2019 Senior Notes and accrued interest through May 12, 2016, including amounts that we elected not to pay on April 15, 2016, have been included in “Liabilities subject to compromise” on our Condensed Consolidated Balance Sheet as of June 30, 2016 (see Note 3). In connection with the bankruptcy filing, we have suspended the accrual of interest on the 2019 Senior Notes during the post-petition period.

16



2020 Senior Notes
Our 2020 Senior Notes, which were issued at par in April 2013, bear interest at an annual rate of 8.50% payable on May 1 and November 1 of each year. The 2020 Senior Notes are senior to our existing and future subordinated indebtedness and are effectively subordinated to our secured indebtedness, including the RBL, 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. Our bankruptcy filing represented an event of default under the indenture governing the 2020 Senior Notes. The 2020 Senior Notes and accrued interest through May 12, 2016, including amounts that we elected not to pay on May 1, 2016, have been included in “Liabilities subject to compromise” on our Condensed Consolidated Balance Sheet as of June 30, 2016 (see Note 3). In connection with the bankruptcy filing, we have suspended the accrual of interest on the 2020 Senior Notes during the post-petition period.
Guarantees
The guarantees under the RBL 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.
9.
Income Taxes
We recognized a federal income tax benefit for the six months ended June 30, 2016 at the statutory rate of 35%; however, the federal tax benefit was fully offset by a valuation allowance against our net deferred tax assets. We considered both the positive and negative evidence in determining that it was more likely than not that some portion or all of our deferred tax assets will not be realized, primarily as a result of recent cumulative losses. We recognized a minimal state deferred income tax expense for the six months ended June 30, 2015 at an effective rate of 0.2%. We received a state income tax refund of less than $0.1 million during the six months ended June 30, 2016.

10.
Exit Activities
We have committed to a number of actions, or exit activities, consistent with our current business plans and certain legacy actions from prior periods for which we have continuing financial commitments. The most significant of these activities are attributable to an overall reduction in the scope and scale of our organization and require payments to satisfy obligations associated with the underlying commitments. The following summarizes our most significant exit activities.
Reductions in Force
In connection with efforts to reduce our administrative costs and to appropriately size our organization for emergence from bankruptcy, we have taken certain actions to reduce our total employee headcount. We incurred costs for severance and termination benefits in the amount of $0.8 million in February 2016 in connection with the termination of 10 employees. We reduced our total employee headcount by an additional 18 employees in June 2016 and incurred severance and termination benefits in the amount of $0.3 million. We paid a total of $0.7 million attributable to these reductions in force during the period ending June 30, 2016 leaving $0.4 million outstanding as of June 30, 2016. As this remaining amount relates entirely to a pre-petition obligation, it has been included in “Liabilities subject to compromise” on our Condensed Consolidated Balance Sheet as of June 30, 2016.
We have committed to a further reduction in force by 26 employees to be completed upon the earlier of our emergence from bankruptcy or October 31, 2016. In connection with this action, we anticipate paying a total of $1.7 million, including $1.2 million in severance and termination benefits and $0.5 million in retention bonuses. The affected employees must continue to provide services through the aforementioned term in order to receive these benefits. Accordingly, we incurred a charge and established an accrual representing the period for which these benefits have been earned.
The costs associated with these reduction-in-force and retention actions are included as a component of our “General and administrative” expenses. The related obligations, with the exception of the aforementioned $0.4 million pre-petition obligation, are included in “Accounts payable and accrued liabilities” on our Condensed Consolidated Balance Sheet.
Drilling Rig Termination
In connection with the suspension of our 2016 drilling program in the Eagle Ford, we terminated our one remaining drilling rig contract and incurred $1.3 million in early termination charges. This charge was recorded as a component of exploration expense for the periods ended June 30, 2016. Because this contract termination gave rise to a pre-petition commitment, which remains unpaid at June 30, 2016, the associated obligation has been included in “Liabilities subject to compromise” on our Condensed Consolidated Balance Sheet as of June 30, 2016.

17



Firm Transportation Obligation
We have a contractual obligation 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. While we sell our unused firm transportation to the extent possible, we recognized an obligation in 2012 representing the liability for estimated discounted future net cash outflows over the remaining term of the contract.
The following table reconciles the firm transportation obligation as of the dates presented:
 
As of
 
June 30,
 
December 31,
 
2016
 
2015
Balance at beginning of period
$
13,461

 
$
14,790

Accretion
317

 
942

Cash payments, net
(1,059
)
 
(2,271
)
Balance at end of period
$
12,719

 
$
13,461

The accretion of the obligation, net of any recoveries from periodic sales of our contractual capacity, has been charged as an offset to Other revenue. In connection with our bankruptcy filing, we have rejected the underlying contract associated with this obligation. Accordingly, we suspended the accretion effective May 12, 2016 and have included the entire obligation in “Liabilities subject to compromise” on our Condensed Consolidated Balance Sheet as of June 30, 2016.


18



11.
Additional Balance Sheet Detail
The following table summarizes components of selected balance sheet accounts as of the dates presented:
 
As of
 
June 30,
 
December 31,
 
2016
 
2015
Other current assets:
 

 
 

Tubular inventory and well materials
$
2,214

 
$
2,878

Prepaid expenses
2,718

 
4,184

Other
7

 
42

 
$
4,939

 
$
7,104

Other assets:
 

 
 

Assets of supplemental employee retirement plan (“SERP”)
$
4,220

 
$
4,123

Deferred issuance costs of the RBL 1

 
1,572

Other
2,520

 
2,655

 
$
6,740

 
$
8,350

Accounts payable and accrued liabilities:
 

 
 

Trade accounts payable 2
$
23,394

 
$
11,603

Drilling costs
2,228

 
12,074

Royalties and revenue – related
10,662

 
39,119

Compensation – related 2
685

 
9,904

Interest 2
18

 
15,531

Other 2
16,173

 
15,294

 
$
53,160

 
$
103,525

Other liabilities:
 

 
 

Deferred gains on sales of assets
$
80,967

 
$
82,943

Firm transportation obligation 2

 
10,705

Asset retirement obligations (“AROs”)
3,379

 
2,621

Defined benefit pension obligations 2

 
1,129

Postretirement health care benefit obligations 2

 
731

Compensation – related 2

 
1,447

Deferred compensation – SERP obligations and other 2

 
4,434

Other 2

 
928

 
$
84,346

 
$
104,938

_______________________
1 These costs were charged to interest expense during the three months ended June 30, 2016 in advance of our Chapter 11 filing (see Note 8).
2 Certain amounts associated with these liabilities that were incurred in pre-petition periods have been reclassified as “Liabilities subject to compromise” as of June 30, 2016 (see Note 3).


12.
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 June 30, 2016, the carrying values of all of these financial instruments, except the portion of our debt obligations with fixed interest rates, approximated fair value.

19



The following table summarizes the fair value of our debt obligations with fixed interest rates, which is estimated based on the published market prices for these financial liabilities, as of the dates presented:
 
As of
 
June 30, 2016
 
December 31, 2015
 
Fair
Value
 
Carrying
Value
 
Fair
Value
 
Carrying
Value
Senior Notes due 2019
$
22,500

 
$
300,000

 
$
40,830

 
$
300,000

Senior Notes due 2020
58,125

 
775,000

 
125,473

 
775,000

 
$
80,625

 
$
1,075,000

 
$
166,303

 
$
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 June 30, 2016
 
 
Fair Value
 
Fair Value Measurement Classification
Description
 
Measurement
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 

 
 

 
 

 
 

Assets of SERP
 
$
4,220

 
$
4,220

 
$

 
$

Liabilities:
 
 

 
 

 
 

 
 

Commodity derivative liabilities – current
 
(4,527
)
 

 
(4,527
)
 

Commodity derivative liabilities – noncurrent
 
(13,715
)
 

 
(13,715
)
 

Deferred compensation – SERP obligations 1
 

 

 

 

_______________________
1 The amounts associated with these liabilities were included in “Liabilities subject to compromise” as of June 30, 2016 (see Note 3).
 
 
As of December 31, 2015
 
 
Fair Value
 
Fair Value Measurement Classification
Description
 
Measurement
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 

 
 

 
 

 
 

Commodity derivative assets – current
 
$
97,956

 
$

 
$
97,956

 
$

Assets of SERP
 
4,123

 
4,123

 

 

Liabilities:
 
 

 
 

 
 

 
 

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

 

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 six months ended June 30, 2016 and 2015.
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.

20



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.
13.
Commitments and Contingencies
Firm Transportation Commitments
We have a contract for firm transportation capacity rights attributable to our production in the Marcellus Shale for specified daily volumes on a pipeline system with a remaining term of 13 years. The contract requires us to pay transportation demand charges regardless of the amount of pipeline capacity we use. The minimum commitment under this agreement is $0.6 million for the remainder of 2016 and approximately $1.1 million per year through 2028. We may sell excess capacity to third parties at our discretion. We have rejected this contract in our bankruptcy proceedings.
Gathering and Intermediate Transportation Commitments
We have a long-term agreement for natural gas gathering, compression and gas lift services for a substantial portion of our natural gas production in the South Texas region through 2039. The agreement requires us to make certain minimum payments regardless of the volume of natural gas production until December 2016. The minimum fee requirement under this agreement is $2.5 million for the remainder of 2016.
We also have long-term agreements for gathering and intermediate pipeline transportation services for a substantial portion of our crude oil and condensate production in the South Texas region through 2041. These agreements, under which we are currently operating, require us to commit certain minimum volumes of crude oil production for the first ten years of the agreements terms, resulting in minimum fee requirements of approximately $12.3 million on an annual basis; however, we are currently in the process of amending and assuming these agreements.
Drilling Carry
In connection with our August 2014 acquisition of undeveloped acreage in the Eagle Ford in Lavaca County, Texas, we committed to providing a drilling carry in the amount of $10.7 million to support development of this acreage through July 2017. If we have not incurred the full balance of the drilling carry by certain dates in 2016 and 2017, we will be required to make a cash payment to the seller to satisfy any shortfall. As we have not completed our drilling requirements for the June 2016 milestone, we recorded a charge of $2.0 million under the drilling carry commitment in the three months ended June 30, 2016 as a component of exploration expense; however, the corresponding obligation has been included in “Liabilities subject to compromise” on our Condensed Consolidated Balance Sheet as of June 30, 2016.
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 that remained outstanding as of June 30, 2016. During the three months ended June 30, 2016, we established a reserve for a dispute with certain vendors attributable to sales and use taxes in the amount of $0.2 million. We anticipate that claims will be filed by the vendors for each of these matters. As they are both attributable to pre-petition claims, the obligations have been classified as subject to compromise (see Note 3). As of June 30, 2016, we also had AROs of approximately $3.4 million attributable to the plugging of abandoned wells. 

21



14.
Shareholders’ Equity
The following tables summarize the components of our shareholders equity (deficit) and the changes therein as of and for the six months ended June 30, 2016 and 2015:
 
As of
 
 
 
 
 
 
 
As of
 
December 31,
 
 
 
Dividends
 
All Other
 
June 30,
 
2015
 
Net Loss
 
Declared
 
Changes 1
 
2016
Preferred stock 2
$
3,146

 
$

 
$

 
$
(1,266
)
 
$
1,880

Common stock 2
628

 

 

 
69

 
697

Paid-in capital 2
1,211,088

 

 

 
(2,725
)
 
1,208,363

Accumulated deficit
(2,130,271
)
 
(95,453
)
 

 

 
(2,225,724
)
Deferred compensation obligation
3,440

 

 

 

 
3,440

Accumulated other comprehensive income 3
422

 

 

 
(38
)
 
384

Treasury stock
(3,574
)
 

 

 

 
(3,574
)
 
$
(915,121
)
 
$
(95,453
)
 
$

 
$
(3,960
)
 
$
(1,014,534
)
 
 
 
 
 
 
 
 
 
 
 
As of
 
 
 
 
 
 
 
As of
 
December 31,
 
 
 
Dividends
 
All Other
 
June 30,
 
2014
 
Net Loss
 
Declared 4
 
Changes 1
 
2015
Preferred stock
$
4,044

 
$

 
$

 
$

 
$
4,044

Common stock
529

 

 

 
1

 
530

Paid-in capital
1,206,305

 

 

 
1,549

 
1,207,854

Accumulated deficit
(535,176
)
 
(137,294
)
 
(12,134
)
 

 
(684,604
)
Deferred compensation obligation
3,211

 

 

 
143

 
3,354

Accumulated other comprehensive income 3
249

 

 

 
(21
)
 
228

Treasury stock
(3,345
)
 

 

 
(143
)
 
(3,488
)
 
$
675,817

 
$
(137,294
)
 
$
(12,134
)
 
$
1,529

 
$
527,918

_______________________
1 Includes equity-classified share-based compensation of $(3,922) and $2,106 for the six months ended June 30, 2016 and 2015, respectively.
2 A total of 52 shares, or 5,159 depositary shares, of our Series A 6% Convertible Perpetual Preferred Stock (the “Series A Preferred Stock”) were converted into 85,982 shares of our common stock during the six months ended June 30, 2016. A total of 12,619 shares, or 1,261,850 depositary shares, of our Series B 6% Convertible Perpetual Preferred Stock (the “Series B Preferred Stock”) were converted into 6,879,222 shares of our common stock during the six months ended June 30, 2016. No Series A Preferred Stock or Series B Preferred Stock was converted during the six months ended June 30, 2015.
3 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 six months ended June 30, 2016 and 2015 represent reclassifications from AOCI to net periodic benefit expense, a component of General and administrative expenses, of $(38) and $(21), respectively, and are presented above net of taxes of $(11) in the 2015 period.
4 Includes dividends declared of $300.00 per share on the Series A Preferred Stock for the six months ended June 30, 2016 and $300.00 per share on the Series B Preferred Stock for the six months ended June 30, 2015.
In September 2015, we announced a suspension of quarterly dividends on the Series A Preferred Stock and Series B Preferred Stock for the quarter ended September 30, 2015. The suspension was extended through June 30, 2016. Pursuant to the Eleventh Amendment, we are precluded from making dividend payments on our Series A and Series B Preferred Stock. Our articles of incorporation provide that any unpaid dividends will accumulate. While the accumulation does not result in presentation of a liability on the balance sheet, the accumulated dividends are deducted from our net income (or added to our net loss) in the determination of income (loss) attributable to common shareholders and, as appropriate, the corresponding computation of earnings (loss) per share. As of June 30, 2016, we had accumulated a total of $16.6 million in unpaid preferred stock dividends, including $2.8 million attributable to the Series A Preferred Stock and $13.8 million attributable to the Series B Preferred Stock.
If we do not pay dividends on our Series A Preferred Stock and Series B Preferred Stock for six quarterly periods, whether consecutive or non-consecutive, the holders of the shares of both series of preferred stock, voting together as a single class, will have the right to elect two additional directors to serve on our board of directors until all accumulated and unpaid dividends are paid in full. Because it is highly likely that our preferred stock will be canceled, extinguished and discharged upon emergence from bankruptcy, we do not expect that holders of our preferred stock will be able to exercise such rights.

22




15.
Share-Based Compensation and Other Benefit Plans
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 the LTI Plan as a component of “General and administrative” on our Condensed Consolidated Statements of Operations.
With the exception of performance-based restricted stock units (“PBRSUs”), all of the awards issued under the 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 typically considered liability-classified awards and are included in “Accounts payable and accrued liabilities” (current portion) and “Other liabilities” (noncurrent portion) 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.
As of June 30, 2016, we had $7.1 million of vested PBRSUs; however, the corresponding obligation has been included in “Liabilities subject to compromise” on our Condensed Consolidated Balance Sheet as of June 30, 2016 (see Note 3). None of of our remaining unvested PBRSUs had value as of June 30, 2016.
In April 2016, we canceled all of our outstanding and unvested restricted stock unit awards which resulted in a reversal of share-based compensation of approximately $3.6 million. In addition, a substantial portion of our stock option awards were forfeited in connection with our 2016 reduction in force actions as described in Note 10. Accordingly, we recorded reversals to share-based compensation expense associated with those items as well. We continue to account for all remaining stock option grants that have not been forfeited in the normal course although we anticipate that these remaining share-based compensation awards will ultimately be canceled in connection with our emergence from bankruptcy in the third quarter of 2016.
The following table summarizes our share-based compensation expense recognized for the periods presented:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Equity-classified awards:
 
 
 
 
 
 
 
Stock option awards
$
155

 
$
387

 
$
(147
)
 
$
780

Common, deferred and restricted stock and stock unit awards
(3,476
)
 
729

 
(3,775
)
 
1,326

 
(3,321
)
 
1,116

 
(3,922
)
 
2,106

Liability-classified awards
(12
)
 
(214
)
 
(19
)
 
165

 
$
(3,333
)
 
$
902

 
$
(3,941
)
 
$
2,271

We maintain the Penn Virginia Corporation and Affiliated Companies Employees 401(k) Plan (the “401(k) Plan”), a defined contribution plan, which covers substantially all of our employees. We recognized $0.3 million and $0.5 million of expense attributable the 401(k) Plan for the six months ended June 30, 2016 and 2015. In accordance with motions filed with the Bankruptcy Court, we continue to provide for and remit employer matching contributions to the 401(k) Plan.
We maintain unqualified legacy defined benefit pension and defined benefit postretirement plans that cover a limited population of former employees, all of whom retired prior to 2000. The combined expense recognized with respect to these plans was less than $0.1 million for each of the six months ended June 30, 2016 and 2015. In accordance with motions filed with the Bankruptcy Court, we continue to provide for and pay the benefits associated with these plans.

23



16.
Interest Expense
 
The following table summarizes the components of interest expense for the periods presented:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Interest on borrowings and related fees 1
$
11,344

 
$
23,324

 
$
34,649

 
$
46,132

Amortization of debt issuance costs 2
20,920

 
1,176

 
22,189

 
2,280

Capitalized interest
(43
)
 
(1,477
)
 
(183
)
 
(3,376
)
 
$
32,221

 
$
23,023

 
$
56,655

 
$
45,036

_______________________
1 Absent the bankruptcy proceedings and the corresponding suspension of the accrual of interest on unsecured debt, we would have recorded total contractual interest expense of $23.5 million and $46.9 million for the three and six months ended June 30, 2016, including $5.4 million and $10.9 million attributable to the 2019 Senior Notes and $16.5 million and $32.9 million attributable to the 2020 Senior Notes.
2 Includes $20.5 million related to the accelerated write-off of unamortized debt issuance costs associated with the RBL and Senior Notes (see Note 8).



17.
Earnings (Loss) 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
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Net loss
$
(61,980
)
 
$
(80,129
)
 
$
(95,453
)
 
$
(137,294
)
Less: Preferred stock dividends 1
(2,820
)
 
(6,067
)
 
(5,972
)
 
(12,134
)
Net loss attributable to common shareholders – basic and diluted
$
(64,800
)
 
$
(86,196
)
 
$
(101,425
)
 
$
(149,428
)
 
 
 
 
 
 
 
 
Weighted-average shares – basic
89,051

 
72,398

 
87,496

 
72,330

Effect of dilutive securities 2

 

 

 

Weighted-average shares – diluted
89,051

 
72,398

 
87,496

 
72,330

_______________________
1 Preferred stock dividends were excluded from the computation of diluted earnings (loss) per share for the three and six months ended June 30, 2016 and 2015, as the assumed conversion of the outstanding preferred stock would have been anti-dilutive.
2 For the six months ended June 30, 2016 and 2015, approximately 26.6 million and 31.3 million, respectively, of 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 (loss) per common share.

24



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: 
our ability to prosecute, confirm and consummate a plan of reorganization with respect to the Chapter 11 cases;
the ability to maintain relationships with suppliers, customers, employees and other third parties that are critical to our operations in Chapter 11;
our ability to obtain approval with respect to motions or other requests made to the Bankruptcy Court in the Chapter 11 cases;
the effects of the bankruptcy petitions on us and on the interests of various constituents, including holders of our common and preferred stock;
Bankruptcy Court rulings in the Chapter 11 cases;
the length of time that we will operate under Chapter 11 protection and the continued availability of operating capital during the pendency of the proceedings;
risks associated with third party motions in the Chapter 11 cases, which may interfere with our ability to confirm and consummate a plan of reorganization;
the ability of third parties to seek and obtain Bankruptcy Court approval to convert the Chapter 11 cases to Chapter 7 cases;
potential adverse effects of the Chapter 11 proceedings on our liquidity and results of operations;
significantly increased advisory and other costs to execute a plan of reorganization;
our ability to satisfy our short-term and long-term liquidity needs, including our inability to generate sufficient cash flows from operations or to obtain adequate financing to fund our capital expenditures and meet working capital needs, and our ability to continue as a going concern;
negative events or publicity adversely affecting our ability to maintain our relationships with our suppliers, service providers, customers, employees, and other third parties;
the ability of third parties to seek and obtain Bankruptcy Court approval to terminate contracts and other agreements with us;
the actions and decisions of our creditors and other third parties who have interests in our Chapter 11 proceedings that may be inconsistent with our plans;
our ability to obtain sufficient financing to allow us to emerge from bankruptcy and execute our business plans post-emergence;
uncertainty of our ability to improve our operating structure, financial results and profitability following emergence from Chapter 11 and other risks and uncertainties related to our emergence from Chapter 11;
new capital structure and the adoption of fresh start accounting, including the risk that assumptions and factors used in estimating enterprise value vary significantly from the current estimates in connection with the application of fresh start accounting;
plans, objectives, expectations and intentions contained in this report that are not historical;
our ability to become quoted on a listing exchange;
our ability to execute our business plan in the current depressed commodity price environment;
our ability to attract, motivate and retain key employees;
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 resumption of our drilling program;
the projected demand for and supply of oil, NGLs and natural gas;
our ability to contract for drilling rigs, supplies and services at reasonable costs;

25



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;
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;
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 the ability of these parties to meet their future obligations;
compliance with and changes in governmental regulations or enforcement practices, especially with respect to environmental, health and safety matters;
physical, electronic and cybersecurity breaches;
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, 2015 and Item 1A of Part II of this Quarterly Report on Form 10-Q.
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 us or persons acting on our 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.

26



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, “Financial Statements.” All dollar amounts presented in the tables that follow are in thousands unless otherwise indicated. Also, due to the combination of different units of volumetric measure, the number of decimal places presented and rounding, certain results may not calculate explicitly from the values presented in the tables.

Overview and Executive Summary
We are an independent oil and gas company engaged in the exploration, development and production of oil, NGLs and natural gas. Our current operations consist primarily of operating our producing wells in the Eagle Ford Shale, or the Eagle Ford, in South Texas. Our operations are substantially concentrated with over 90 percent of our production, revenues and capital expenditures being attributable to this region. We also have less significant operations in Oklahoma, primarily in the Granite Wash.
As detailed in the discussion of our financial condition that follows, we have been operating as a “debtor-in-possession” since May 12, 2016. There are certain inherent risks associated with our ongoing bankruptcy proceedings. Accordingly, there can be no assurance that we will emerge from bankruptcy as a “going concern.” Furthermore, the realization of our assets and satisfaction of our liabilities and other commitments, without substantial adjustments, as well as a change in ownership, are also subject to significant uncertainty.
The following table sets forth certain summary operating and financial statistics for the periods presented: 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
Total production (MBOE)
1,156

 
2,140

 
2,551

 
4,365

Average daily production (BOEPD)
12,706

 
23,519

 
14,014

 
24,116

Crude oil and NGL production (MBbl)
978

 
1,664

 
2,164

 
3,397

Crude oil and NGL production as a percent of total
85
%
 
78
%
 
85
%
 
78
%
Product revenues, as reported
$
36,367

 
$
83,123

 
$
66,688

 
$
156,258

Product revenues, as adjusted for derivatives
$
52,760

 
$
117,963

 
$
113,640

 
$
228,590

Crude oil and NGL revenues as a percent of total, as reported
95
%
 
91
%
 
94
%
 
90
%
Realized prices:
 
 
 
 
 
 
 
Crude oil ($/Bbl)
$
40.48

 
$
55.22

 
$
32.87

 
$
49.62

NGL ($/Bbl)
$
13.01

 
$
13.53

 
$
10.95

 
$
13.56

Natural gas ($/Mcf)
$
1.79

 
$
2.54

 
$
1.86

 
$
2.73

Aggregate ($/BOE)
$
31.45

 
$
38.84

 
$
26.15

 
$
35.80

Operating costs ($/BOE):
 
 
 
 
 
 
 
Lease operating
$
4.52

 
$
5.10

 
$
4.48

 
$
5.15

Gathering, processing and transportation
4.02

 
2.98

 
3.32

 
3.18

Production and ad valorem taxes
1.87

 
2.32

 
1.14

 
2.21

General and administrative 1
4.90

 
4.40

 
4.54

 
4.58

Total operating costs
$
15.31

 
$
14.80

 
$
13.48

 
$
15.12

Depreciation, depletion and amortization ($/BOE)
$
10.16

 
$
39.91

 
$
10.02

 
$
40.37

Cash provided by operating activities
$
17,242

 
$
52,729

 
$
45,773

 
$
98,281

Cash paid for capital expenditures, net
$
570

 
$
94,999

 
$
14,575

 
$
263,993

Cash and cash equivalents at end of period
 
 
 
 
$
38,997

 
$
4,441

Credit available under debtor-in-possession credit facility 2
 
 
 
 
$
25,000

 
$

Credit available under revolving credit facility at end of period 3
 
 
 
 
$

 
$
211,196

Net development wells drilled and completed

 
13.5

 
2.3

 
27.6

______________________
1 Excludes equity-classified and liability-classified share-based compensation of $(2.88) and $(1.54) and $0.42 and $0.52, strategic and financial advisory costs of $6.03 and $7.07 and $0.19 and $0.11 and restructuring expenses of $0.29 and $0.43 and $0.35 and $0.17 for the three and six months ended June 30, 2016 and 2015.
2 This credit facility was made available and approved by the Bankruptcy Court on May 13, 2016.
3 Based on commitments of $114.4 million and $425 million as of June 30, 2016 and 2015, respectively.

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Key Developments
The following corporate actions and general business developments had or may have a significant impact on the financial reporting and disclosure of our results of operations, financial position and cash flows:
Chapter 11 Proceedings
On May 12, 2016, or the Petition Date, we and eight of our subsidiaries including Penn Virginia Holding Corp.; Penn Virginia MC Corporation; Penn Virginia MC Energy L.L.C.; Penn Virginia MC Operating Company L.L.C.; Penn Virginia Oil & Gas Corporation; Penn Virginia Oil & Gas GP LLC; Penn Virginia Oil & Gas LP LLC; and Penn Virginia Oil & Gas, L.P., or collectively, the Chapter 11 Subsidiaries, filed voluntary petitions (In re Penn Virginia Corporation, et al, Case No. 16-32395) seeking relief under Chapter 11 of Title 11 of the United States Bankruptcy Code, or the Bankruptcy Code, in the United States Bankruptcy Court for the Eastern District of Virginia, or the Bankruptcy Court. Prior to the Petition Date, we had engaged Kirkland & Ellis LLP, or K&E, Jefferies LLC, or Jefferies, and Alvarez and Marsal North America, LLC, or A&M, and appointed R. Seth Bullock, Managing Director at A&M, to act as our Chief Restructuring Officer in our efforts to restructure and evaluate various strategic alternatives. In connection with our bankruptcy proceedings, we have continued our engagements with these professional service firms.
Debtors-In-Possession. We and the Chapter 11 Subsidiaries are currently operating our business as debtors-in-possession in accordance with the applicable provisions of the Bankruptcy Code. The Bankruptcy Court has granted all “first day motions” filed by us and the Chapter 11 Subsidiaries, which were designed primarily to minimize the impact of the Chapter 11 proceedings on our normal day-to-day operations, our customers, regulatory agencies, including taxing authorities, and employees. As a result, we are not only able to conduct normal business activities and pay all associated obligations for the post-petition period, we are also authorized to pay and have paid (subject to limitations applicable to payments of certain pre-petition obligations) pre-petition employee wages and benefits, pre-petition amounts owed to certain lienholders, amounts due to taxing authorities for production and other related taxes and funds belonging to third parties, including royalty and working interest holders. During the pendency of the Chapter 11 case, all transactions outside the ordinary course of our business require the prior approval of the Bankruptcy Court.
Automatic Stay. Subject to certain specific exceptions under the Bankruptcy Code, the Chapter 11 filings automatically stayed most judicial or administrative actions against us and the Chapter 11 Subsidiaries as well as efforts by creditors to collect on or otherwise exercise rights or remedies with respect to pre-petition claims. As a result, for example, most creditor actions to obtain possession of our property or any of the Chapter 11 Subsidiaries, or to create, perfect or enforce any lien against our property or any of the Chapter 11 Subsidiaries, or to collect on or otherwise exercise rights or remedies with respect to a pre-petition claim are stayed.         
Restructuring Support Agreement. Immediately prior to the Petition Date, the holders, or the Ad Hoc Committee, of approximately 86 percent of the $1,075 million principal amount of our 7.25% Senior Notes due 2019, or the 2019 Senior Notes, and 8.50% Senior Notes due 2020, or the 2020 Senior Notes, and, together with the 2019 Senior Notes, or the Senior Notes, agreed, pursuant to a restructuring support agreement, or the RSA, to support a plan under which all of our Senior Notes are converted to equity in the reorganized company. Under the RSA, holders of the Senior Notes and certain unsecured creditors are to receive their pro rata share of one hundred percent of the reorganized company’s common stock, or the New Common Stock, in exchange for their claims, subject only to dilution as a result of a proposed new management incentive program, any fees payable in New Common Stock under the terms of the Backstop Commitment Agreement (see “Backstop Commitment Agreement” below) and New Common Stock issued in the Rights Offering (see “Rights Offering” below). The RSA includes an agreed timeline for the Chapter 11 proceedings that, if met, would result in our emergence from bankruptcy in the third quarter of 2016.
Creditors Committee. On May 25, 2016, the United States Trustee for the Eastern District of Virginia, or the U.S. Trustee, appointed the Official Committee of Unsecured Claimholders, or the UCC, pursuant to section 1102 of the Bankruptcy Code. In addition to professional fees and other costs incurred that are attributable to the services provided by K&E, Jefferies, A&M and other representatives, we are responsible for the reasonable costs, as approved by the Bankruptcy Court, incurred by the UCC, the Ad Hoc Committee and the holders, or the RBL Lenders, of 100 percent of the claims attributable to our pre-petition revolving credit agreement, as amended, or the RBL, during the course of the Chapter 11 proceedings. These post-petition costs, as well as administrative fees charged by the U.S. Trustee, have been reported in “Reorganization items, net” in our Condensed Consolidated Statement of Operations. Similar costs that were incurred during the pre-petition periods have been reported in “General and administrative” expenses.
Ad Hoc Equity Committee. In June 2016, a group of holders of approximately three percent of our common stock, or the Ad Hoc Equity Holders, filed a motion with the U.S. Trustee requesting that the U.S. Trustee appoint an official committee of equity holders, which the U.S. Trustee denied. Subsequently, in July 2016, the Ad Hoc Equity Holders filed with the Bankruptcy Court, among other motions, a motion requesting that the Bankruptcy Court appoint an official committee of equity holders. A hearing on this motion is scheduled for August 4, 2016.

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Plan of Reorganization. On June 28, 2016, we and the Chapter 11 Subsidiaries filed with the Bankruptcy Court the First Amended Joint Chapter 11 Plan of Reorganization of Penn Virginia Corporation and its Debtor Affiliates, or the Plan, as well as the Disclosure Statement for the First Amended Joint Chapter 11 Plan of Penn Virginia Corporation and its Debtor Affiliates, or the Disclosure Statement. The Bankruptcy Court has authorized us to solicit acceptances for the Plan and approved the Disclosure Statement and other related solicitation materials and procedures necessary to solicit approval or objections to the Plan. We are currently in the process of soliciting votes with respect to the Plan. The Plan is supported by us, the RBL Lenders, the Ad Hoc Committee and the UCC. A hearing to consider confirmation of the Plan is scheduled to be held on August 11, 2016 in the Bankruptcy Court, or the Confirmation Hearing.
If the Plan is ultimately confirmed by the Bankruptcy Court, we and the Chapter 11 Subsidiaries would exit bankruptcy pursuant to the terms of the Plan. Under the Plan, the claims against and interests in us and the Chapter 11 Subsidiaries are grouped into classes based, in part, on their respective priority. The Plan provides that, upon emergence from bankruptcy:
the approximately $1,122 million of indebtedness, including accrued interest, attributable to our Senior Notes and certain other unsecured claims will be exchanged for approximately 43.4 percent of the New Common Stock;
holders of claims arising under the debtor-in-possession, or DIP, credit facility, or the DIP Facility (see “Debtor-In-Possession Financing” below) will be paid in full from cash on hand and proceeds from the Exit Facility (see “Exit Facility” below) and the Rights Offering;
holders of claims arising under the RBL will be paid in full from cash on hand and proceeds from the Exit Facility and the Rights Offering;
the Ad Hoc Committee will receive a backstop fee consisting of approximately 3.2 percent of the New Common Stock;
holders of the Senior Notes and Republic Midstream, LLC, or Republic Midstream, will be entitled to participate in the Rights Offering; and
our current preferred stock and common stock will be canceled, extinguished and discharged.
The Plan also provides that the new board of directors of the reorganized company will be announced at or before the Confirmation Hearing.
The Plan is subject to acceptance by certain holders of claims against us and the Chapter 11 Subsidiaries and confirmation by the Bankruptcy Court. The Plan is accepted by a class of claims entitled to vote if at least one-half in number and two-thirds in dollar amount of claims actually voting in the class have voted to accept the Plan.
Under certain circumstances set forth in the Bankruptcy Code, the Bankruptcy Court may confirm a plan even if such plan has not been accepted by all impaired classes of claims and equity interests. In particular, a plan may be compelled on a rejecting class if the proponent of the plan demonstrates, among other things, that (1) no class junior to the rejecting class is receiving or retaining property under the plan and (2) no class of claims or interests senior to the rejecting class is being paid more than in full.
Executory Contracts. Subject to certain exceptions, under the Bankruptcy Code, we and the Chapter 11 Subsidiaries may assume, assign, or reject certain executory contracts and unexpired leases subject to the approval of the Bankruptcy Court and fulfillment of certain other conditions. The rejection of an executory contract or unexpired lease is generally treated as a pre-petition breach of such executory contract or unexpired lease and, subject to certain exceptions, relieves us and the Chapter 11 Subsidiaries of performing their future obligations under such executory contract or unexpired lease but may give rise to a general unsecured claim against us or the applicable Chapter 11 Subsidiaries for damages caused by such rejection. The assumption of an executory contract or unexpired lease generally requires us and the Chapter 11 Subsidiaries to cure existing monetary defaults under such executory contract or unexpired lease and provide adequate assurance of future performance. Any description of the treatment of an executory contract or unexpired lease with us or any of the Chapter 11 Subsidiaries, including any description of the obligations under any such executory contract or unexpired lease, is qualified by and subject to any rights we have with respect to executory contracts and unexpired leases under the Bankruptcy Code.
On July 21, 2016, we and the Chapter 11 Subsidiaries filed a motion, or the 9019 Motion, to approve a settlement with Republic Midstream, and Republic Midstream Marketing, LLC, or Republic Marketing, and, together with Republic Midstream, collectively, Republic, pursuant to Rule 9019 of the Federal Rules of Bankruptcy Procedure and to authorize the assumption of certain amended agreements with Republic pursuant to section 365 of the Bankruptcy Code. As set forth in detail in the 9019 Motion, the settlement with Republic provides for the material modification of the agreements with Republic and certain claims, guarantees, and payments in favor of Republic. The hearing to consider the 9019 Motion is scheduled for August 4, 2016.

29



Potential Claims. We and the Chapter 11 Subsidiaries have filed with the Bankruptcy Court Schedules and Statements setting forth, among other things, our and each of the Chapter 11 Subsidiaries’ assets and liabilities. The Schedules and Statements, which are subject to the assumptions disclosed in connection therewith, may be subject to further amendment or modification. Certain holders of pre-petition claims were required to file proofs of claim by June 30, 2016, or the Bar Date. Certain other parties, including taxing authorities and other governmental agencies, are provided additional time beyond the Bar Date to file proofs of claim.
Claims received by the Bar Date are currently in the process of being reviewed and reconciled with our and the Chapter 11 Subsidiaries’ books and records. Differences between amounts scheduled by us and the Chapter 11 Subsidiaries and claims by creditors will be investigated and resolved in connection with the claims resolution process. In light of the expected number of creditors, the claims resolution process may take considerable time to complete and may continue after our emergence from bankruptcy. Accordingly, the ultimate number and amount of allowed claims is not presently known, nor can the ultimate recovery with respect to allowed claims be presently ascertained.
Chapter 11 Filing Impact on Creditors and Shareholders. Under the priority requirements established by the Bankruptcy Code, unless creditors agree otherwise, pre-petition liabilities to creditors and post-petition liabilities must be satisfied in full before the holders of our existing preferred stock and common stock are entitled to receive any distribution or retain any property under a plan of reorganization. The ultimate recovery to creditors, if any, will not be determined until confirmation and implementation of the Plan. The outcome of the Chapter 11 proceedings remains uncertain at this time and, as a result, we cannot accurately estimate the amounts or value of distributions that creditors may receive. We expect that our preferred stock and common stock will receive no distribution with respect to their interests.
Debtor-In-Possession Financing. In connection with the pre-petition negotiations of the RSA, certain holders of the RBL agreed to provide a DIP Facility to us and the Chapter 11 Subsidiaries pursuant to the terms of a DIP credit agreement. The DIP Facility was approved by the Bankruptcy Court and provides for a multi-draw term loan in the aggregate amount of up to $25 million. Pursuant to the Plan, any amounts outstanding under the the DIP Facility will be paid in full in cash upon emergence. As of June 30, 2016, we have not drawn any amounts from the DIP Facility, and we do not expect to do so prior to emergence.
Backstop Commitment Agreement. On May 10, 2016, we entered into a backstop commitment agreement, or the Backstop Commitment Agreement, with the parties thereto, or collectively, the Backstop Parties, pursuant to which the Backstop Parties, which are holders of the Senior Notes, will provide a $50.0 million commitment to backstop the proposed Rights Offering to be conducted in connection with the Plan. Under the Backstop Commitment Agreement, we have agreed to pay the Backstop Parties, on the closing date of the transactions contemplated by the Backstop Commitment Agreement, a commitment premium equal to 6.0 percent of the Rights Offering Amount (as defined below), or the Commitment Premium. If the transactions contemplated by the Backstop Commitment Agreement are consummated, the Commitment Premium will be payable in shares of common stock of the reorganized company. We will also be required to pay, in cash, a termination fee equal to 4.0 percent of the Rights Offering Amount upon the occurrence of certain termination events as set forth in the Backstop Commitment Agreement. Pursuant to the Backstop Commitment Agreement, we will also be required to (A) reimburse the Backstop Parties (i) for reasonable and documented fees and expenses of counsel, consultants and a financial advisor, and any other advisors or consultants as may be reasonably determined by the holders of our Senior Notes who are party to the RSA, or the Consenting Noteholders, and the Backstop Parties, and (ii) for filing fees, if any, required by antitrust laws and reasonable and documented expenses in connection with the transactions contemplated by the Backstop Commitment Agreement and (B) indemnify the Backstop Parties under certain circumstances for losses arising out of the Backstop Commitment Agreement, the Plan and the transactions contemplated thereby.
Rights Offering. In accordance with the Plan, the Backstop Commitment Agreement, and the proposed procedures for the conduct of the Rights Offering or the Rights Offering Procedures, we will offer eligible creditors, including the Backstop Parties, shares of New Common Stock of the reorganized company upon emergence from Chapter 11 for an aggregate purchase price of $50 million, or the Rights Offering Amount. Pursuant to the Backstop Commitment Agreement, the Backstop Parties have agreed to purchase all shares of New Common Stock that are not duly subscribed for pursuant to the Rights Offering at a per share purchase price equal to $45,100,000 divided by the total number of shares of common stock of the reorganized company outstanding as of emergence (without giving effect to the common stock issued or issuable under the Rights Offering or in respect of the Commitment Premium).
The rights to purchase common stock in the Rights Offering, any shares issued upon exercise thereof, and all shares issued to the Backstop Parties pursuant to the Backstop Commitment Agreement, will be issued in reliance upon the exemption from registration under the Securities Act of 1933, or the Securities Act provided by Section 4(a)(2) thereof and/or Regulation D thereunder. As a condition to the closing of the transactions contemplated by the Backstop Commitment Agreement, we will enter into a registration rights agreement with certain of the Backstop Parties entitling such Backstop Parties to request that we register their securities for sale under the Securities Act at various times.

30



The Backstop Commitment Agreement and Rights Offering Procedures have been filed with, and are subject to the approval of, the Bankruptcy Court. The Backstop Parties’ commitments to backstop the Rights Offering, and the other transactions contemplated by the Backstop Commitment Agreement, are conditioned upon the satisfaction of all conditions to the effectiveness of the Plan, and other applicable conditions precedent set forth in the Backstop Commitment Agreement. The issuances of common stock pursuant to the Rights Offering and the Backstop Commitment Agreement are conditioned upon, among other things, confirmation of the Plan by the Bankruptcy Court, and will be effective upon our emergence from Chapter 11.
Restrictions on Trading of Our Equity Securities to Protect Our Use of Net Operating Losses. The Bankruptcy Court has issued a final order pursuant to Sections 105(a), 362(a)(3) and 541 of the Bankruptcy Code enabling us and the Chapter 11 Subsidiaries to avoid limitations on the use of our tax net operating loss carryforwards and certain other tax attributes by imposing certain notice procedures and transfer restrictions on the trading of our equity securities. In general, the order applies to any person that, directly or indirectly, beneficially owns (or would beneficially own as a result of a proposed transfer) at least 4.5 percent of either our outstanding common stock or preferred stock, or a Substantial Stockholder, and requires that each Substantial Stockholder file with the Bankruptcy Court and serve us with notice of such status. Under the order, prior to any proposed acquisition or disposition of equity securities that would result in an increase or decrease in the amount of our equity securities owned by a Substantial Stockholder, or that would result in a person or entity becoming a Substantial Stockholder, such person or entity is required to file with the Bankruptcy Court and notify us of such acquisition or disposition. We have the right to seek an injunction from the Bankruptcy Court to prevent certain acquisitions or sales of our common stock or preferred stock if the acquisition or sale would pose a material risk of adversely affecting our ability to utilize such tax attributes. 
Risks Associated with Chapter 11 Proceedings. For the duration of our Chapter 11 proceedings, our operations and our ability to develop and execute our business plan are subject to the risks and uncertainties associated with the Chapter 11 process as described in Part II, Item 1A, “Risk Factors” of this Quarterly Report on Form 10-Q. Because of these risks and uncertainties, the description of our operations, properties and capital plans may not accurately reflect our operations, properties and capital plans following the Chapter 11 process.
Liabilities Subject to Compromise. Our Condensed Consolidated Balance Sheet as of June 30, 2016 includes “Liabilities subject to compromise,” which represent liabilities that we anticipate will be allowed as claims in our bankruptcy case. These amounts include amounts related to the anticipated rejection of various executory contracts and unexpired leases. Additional amounts may be included in “Liabilities subject to compromise” in future periods if additional executory contracts and unexpired leases are rejected. Conversely, to the extent that such executory contracts or unexpired leases are not rejected and are instead assumed, certain liabilities characterized as subject to compromise may be converted to post-petition liabilities. Because the nature of many of the potential claims has not yet been finally determined at this time, the magnitude of such claims is not reasonably estimable at this time. Such claims or changes in claims may be material.
Differences between liabilities we have included in “Liabilities subject to compromise” on our Condensed Consolidated Balance Sheet as of June 30, 2016 and the claims filed by the Bar Date, or to be filed subsequently, will be investigated and resolved in connection with the claims resolution process. We will continue to evaluate these liabilities throughout the Chapter 11 proceedings and adjust amounts as necessary. Such adjustments may be material.
A summary of the components of our “Liabilities subject to compromise” as of June 30, 2016 is included in Note 3 to our Condensed Consolidated Financial Statements.
Reorganization Items. Our Condensed Consolidated Statement of Operations for the periods ended June 30, 2016 includes “Reorganization items, net,” which reflects costs associated with the Chapter 11 proceedings, principally professional fees, and the costs associated with the DIP Facility. n future periods and in connection with the claims resolution process, we anticipate recording adjustments to “Liabilities subject to compromise” which will be included as a component of “Reorganization items, net,” as necessary.
A summary of the components of our “Reorganization items, net” for the periods ended June 30, 2016 is included in Note 3 to our Condensed Consolidated Financial Statements.
Commodity Hedging Program
From March 2016 up to the date of bankruptcy filing, we terminated all of our remaining pre-petition 2016 derivative contracts for a total of $52.0 million of proceeds that were used to reduce amounts outstanding under the RBL. In connection with these transactions, the counterparties to the derivative contracts, which are also affiliates of the RBL Lenders, transferred the cash proceeds from the transactions directly to the administrative agent under the RBL in order to reduce the amount outstanding thereunder. Accordingly, these transactions have been presented as non-cash financing activities on our Condensed Consolidated Statement of Cash Flows for the period ended June 30, 2016.
On May 13, 2016, the Bankruptcy Court approved our motion to enter into new commodity derivative contracts. Accordingly, we hedged a substantial portion of our future crude oil production through the end of 2019, as required in the RSA, at a weighted-average price of approximately $48.62 per barrel.

31



Exit Activities
Reductions in Force
In connection with efforts to reduce our administrative costs and to appropriately size our organization for emergence from bankruptcy, we have taken certain actions to reduce our total employee headcount. We incurred costs for severance and termination benefits in the amount of $0.8 million in February 2016 in connection with the termination of 10 employees. We reduced our total employee headcount by an additional 18 employees in June 2016 and incurred severance and termination benefits in the amount of $0.3 million. We paid a total of $0.7 million attributable to these reductions in force during the period ending June 30, 2016 leaving $0.4 million outstanding as of June 30, 2016.
We have committed to a further reduction in force by 26 employees to be completed upon the earlier of our emergence from bankruptcy or October 31, 2016. In connection with this action, we anticipate paying a total of $1.7 million, including $1.2 million in severance and termination benefits and $0.5 million in retention bonuses. The affected employees must continue to provide services through the aforementioned term in order to receive these benefits. Accordingly, we incurred a charge and established an accrual representing the period for which these benefits have been earned.
Drilling Rig Termination
In connection with the suspension of our 2016 drilling program in the Eagle Ford, we terminated our one remaining drilling rig contract and incurred $1.3 million in early termination charges. This charge was recorded as a component of our exploration expense for the periods ended June 30, 2016. Because this contract termination gave rise to a pre-petition commitment, which remains unpaid at June 30, 2016, the associated obligation has been classified as a liability subject to compromise.
Production and Development in the Eagle Ford
Our Eagle Ford production was 11,595 BOEPD during the three months ended June 30, 2016, with oil comprising 8,510 BOPD, or 73 percent, and NGLs and natural gas comprising approximately 15 percent and 12 percent. Our second quarter production represented an 18 percent decrease compared to 14,188 BOEPD during the three months ended March 31, 2016, of which 10,504 BOPD, or 74 percent, was crude oil, 14 percent was NGLs and 12 percent was natural gas. The sequential decline in production was attributable to the suspension of our drilling program and natural declines from existing wells. Due primarily to lease expirations for certain leases that are not otherwise held by production, our total position now includes approximately 88,000 net acres in the core liquids-rich “volatile oil window” of the Eagle Ford.
We anticipate our drilling suspension to continue through the term of our bankruptcy proceedings after which we intend to complete wells that were drilled, but not completed, in the pre-petition period and employ one drilling rig and completion crew for the balance of 2016.

Financial Condition
Liquidity
Our primary sources of liquidity have historically included cash from operating activities, borrowings under the RBL, proceeds from sales of assets and, from time to time, proceeds from capital market transactions, including the offering of debt and equity securities. Our cash flows from operating activities are subject to significant volatility due to changes in commodity prices for our crude oil, NGL and natural gas products, as well as variations in our production. The prices for these commodities are driven by a number of factors beyond our control, including global and regional product supply and demand, weather, product distribution, refining and processing capacity and other supply chain dynamics, among other factors. As a result of continued low oil and natural gas prices during 2015 and into 2016, our liquidity has been significantly negatively impacted.
Currently, our liquidity is comprised of our available cash on hand and the availability of up to $25 million in multi-draw term loans under the DIP Facility. As of July 28, 2016, we had approximately $50 million of cash on hand and had not drawn any amounts on the DIP Facility.
Upon our emergence from bankruptcy, which we anticipate in the third quarter of 2016, we expect to have a new four-year senior secured revolving credit facility, or the Exit Facility, in place which is intended to provide us with up to $200 million in borrowing commitments. The initial borrowing base under the Exit Facility is expected to be $128 million. As contemplated in the Plan and depending upon the amount of cash we have on hand at the date of emergence, we expect to draw approximately $50 to $70 million on the Exit Facility to fund a portion of the repayment of the RBL.

32



Capital Resources
Our business plan for 2016 reflects a suspension of our drilling program during the pendency of the bankruptcy proceedings as a result of depressed commodity prices. When we resume a drilling program, we expect to allocate all of our capital expenditures to the Eagle Ford. We continually review our drilling and capital expenditure plans and may change the amount we spend, or the allocations, based on available opportunities, product pricing, industry conditions, cash from operating activities and the overall availability of capital. For a detailed analysis of our historical capital expenditures, see the “Cash Flows” discussion that follows.
Cash on Hand and Cash From Operating Activities. As of July 28, 2016, we had approximately $50 million of cash on hand. In addition to commodity price volatility, as discussed in detail below, our cash from operating activities is impacted by the timing of our working capital requirements. The most significant component thereof is the timing of payments made for drilling and completion capital expenditures as well as lease operating expenses and the related billing and collection of our partners’ share thereof. This component can be substantial to the extent that we are the operator of lower working interest wells. In certain circumstances, we have and will continue to utilize capital cash calls to mitigate the burden on our working capital. In addition, we have been required to make prepayments for certain oilfield products and services due to our weak credit standing.
Historically, we have actively managed our exposure to commodity price fluctuations by hedging the commodity price risk for a portion of our expected production, typically through the use of collar and swap contracts. The level of our hedging activity and duration of the instruments employed depend on our cash flow at risk, available hedge prices, the magnitude of our capital program and our operating strategy. In May 2016, we entered into a series of new derivatives contracts and hedged a substantial portion of our future crude oil production through the end of 2019, as required in the RSA, at a weighted-average price of approximately $48.62 per barrel. Our natural gas hedges expired in 2015 and we anticipate remaining unhedged with respect to natural gas production for the remainder of 2016 and the foreseeable future.
DIP Facility. There are no borrowings under the DIP Facility, and we currently have the full $25 million available to us for working capital and other general corporate purposes in the normal course of business.
RBL Borrowings. Since January 2016, we have not had any available borrowing capacity under the RBL. Since the end of 2015, we have reduced our outstanding borrowings under this facility, primarily through proceeds applied from the termination of our 2016 commodity hedge portfolio, to its current balance of $112.6 million. We also have $1.9 million of letters of credit outstanding under the RBL.
For additional information regarding the terms and covenants under the RBL, see the “Capitalization” discussion that follows. The following table summarizes our borrowing activity under the RBL during the periods presented:
 
Borrowings Outstanding
 
 
 
Weighted-
Average
 
Maximum
 
Weighted-
Average Rate
Three months ended June 30, 2016
$
120,135

 
$
147,065

 
5.0902
%
Six months ended June 30, 2016
$
143,010

 
$
170,000

 
3.9156
%
Proceeds from Sales of Assets. We continually evaluate potential sales of non-core assets, including certain oil and gas properties and non-strategic undeveloped acreage, among others. Any potential sales of assets during the pendency of our bankruptcy proceedings would require the prior approval of the Bankruptcy Court.


33



Cash Flows
The following table summarizes our cash flows for the periods presented:
 
Six Months Ended