UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2011
Commission file number: 1-13283
Penn Virginia Corporation
(Exact name of registrant as specified in its charter)
Virginia
(State or other jurisdiction of
incorporation or organization)
23-1184320
(I.R.S. Employer
Identification Number)
Four Radnor Corporate Center, Suite 200
100 Matsonford Road
Radnor, Pennsylvania 19087
(Address of principal executive offices)
Registrant’s telephone number, including area code: (610) 687-8900
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock, $0.01 Par Value
Name of exchange on which registered
New York Stock Exchange
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes x No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities
Exchange Act of 1934 (“Exchange Act”). Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the 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 x 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 x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. ¨
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 x
Non-accelerated filer ¨
¨
Accelerated filer
Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The aggregate market value of common stock held by non-affiliates of the registrant was $599,073,526 as of June 30, 2011 (the last
business day of its most recently completed second fiscal quarter), based on the last sale price of such stock as quoted on the New York
Stock Exchange. For purposes of making this calculation only, the registrant has defined affiliates as including all directors and executive
officers of the registrant. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
As of February 10, 2012, 45,714,191 shares of common stock of the registrant were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement relating to the registrant’s Annual Meeting of Shareholders, to be held on May 4, 2012, are
incorporated by reference in Part III of this Form 10-K.
PENN VIRGINIA CORPORATION AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended December 31, 2011
Table of Contents
Forward-Looking Statements
Glossary of Certain Industry Terminology
Business
Risk Factors
Item
1.
1A.
1B. Unresolved Staff Comments
2.
3.
4.
Properties
Legal Proceedings
Reserved
Part I
Part II
5.
6.
7.
Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations:
Overview of Business
Key Developments
Results of Operations
Year Ended December 31, 2011 Compared to the Year Ended December 31, 2010
Year Ended December 31, 2010 Compared to the Year Ended December 31, 2009
Liquidity and Capital Resources
Off-Balance Sheet Arrangements
Contractual Obligations
Environmental Matters
Critical Accounting Estimates
New Accounting Standards
7A. Quantitative and Qualitative Disclosures About Market Risk
8.
9.
9A.
9B. Other Information
Financial Statements and Supplemental Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Part III
10.
11.
12.
13.
14.
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Part IV
15.
Exhibits and Financial Statement Schedules
Signatures
Page
1
2
4
9
14
15
20
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20
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23
24
26
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33
41
46
46
47
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48
50
83
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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
Exchange Act. Because such statements include risks, uncertainties and contingencies, actual results may differ materially from those
expressed or implied by such forward-looking statements. These risks, uncertainties and contingencies include, but are not limited to, the
following:
•
the volatility of commodity prices for natural gas, natural gas liquids and oil;
• our ability to develop, explore for and replace oil and gas reserves and sustain production;
• our ability to generate profits or achieve targeted reserves in our development and exploratory drilling and well operations;
• any impairments, write-downs or write-offs of our reserves or assets;
•
•
the projected demand for and supply of natural gas, natural gas liquids and oil;
reductions in the borrowing base under our revolving credit facility (“Revolver”);
• our ability to contract for drilling rigs, supplies and services at reasonable costs;
• our ability to obtain adequate pipeline transportation capacity for our oil and gas production at reasonable cost and to sell the
production at, or at reasonable discounts to, market prices;
•
the uncertainties inherent in projecting future rates of production for our wells and the extent to which actual production differs from
estimated proved oil and gas reserves;
• drilling and operating risks;
• our ability to compete effectively against other independent and major oil and natural gas companies;
• our ability to successfully monetize select assets and repay our debt;
•
leasehold terms expiring before production can be established;
• environmental liabilities that are not covered by an effective indemnity or insurance;
•
•
the timing of receipt of necessary regulatory permits;
the effect of commodity and financial derivative arrangements;
• our ability to maintain adequate financial liquidity and to access adequate levels of capital on reasonable terms;
•
the occurrence of unusual weather or operating conditions, including force majeure events;
• our ability to retain or attract senior management and key technical employees;
• counterparty risk related to their ability to meet their future obligations;
• changes in governmental regulation or enforcement practices, especially with respect to environmental, health and safety matters;
• uncertainties relating to general domestic and international economic and political conditions; and
• other risks set forth in Item 1A of this Annual Report on Form 10-K for the year ended December 31, 2011.
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. 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.
1
Glossary of Certain Industry Terminology
The following are abbreviations and definitions commonly used in the oil and gas industry that are used within this Annual Report on
Form 10-K.
Bbl
Bcf
Bcfe
A standard barrel of 42 U.S. gallons liquid volume of oil or other liquid hydrocarbons.
One billion cubic feet of natural gas.
One billion cubic feet of natural gas equivalent with one barrel of crude oil, condensate or natural gas
liquids converted to six thousand cubic feet of natural gas based on the estimated relative energy content.
BOEPD
Barrels of oil equivalent per day.
Developed acreage
Lease acreage that is allocated or assignable to producing wells or wells capable of production.
Development well
A well drilled within the proved area of an oil or gas reservoir to the depth of a stratigraphic horizon
known to be productive.
Dry hole
A well found to be incapable of producing either oil or gas in sufficient commercial quantities to justify
completion of the well.
Exploratory well
A well drilled to find a new field or to find a new reservoir in a field previously found to be productive of
oil or gas in another reservoir. Generally, an exploratory well is any well that is not a development well, a
service well or a stratigraphic test well.
GAAP
Accounting principles generally accepted in the Unites States of America.
Gross acre or well
An acre or well in which a working interest is owned.
LIBOR
MBbl
Mcf
Mcfe
MMBbl
MMBtu
MMcf
MMcfe
London Interbank Offered Rate.
One thousand barrels of oil or other liquid hydrocarbons.
One thousand cubic feet of natural gas.
One thousand cubic feet of natural gas equivalent with one barrel of oil or condensate converted to six
thousand cubic feet of natural gas based on the estimated relative energy content.
One million barrels of oil or other liquid hydrocarbons.
One million British thermal units, a measure of energy content.
One million cubic feet of natural gas.
One million cubic feet of natural gas equivalent with one barrel of oil or condensate converted to six
thousand cubic feet of natural gas based on the estimated relative energy content.
Net acre or well
The number of gross acres or wells multiplied by the owned working interest in the gross acres or wells.
NGL
NYMEX
Operator
Natural gas liquid.
New York Mercantile Exchange.
The entity responsible for the exploration and/or production of a lease.
Productive wells
Wells that are not dry holes.
Proved reserves
Those quantities of oil and gas which, by analysis of geosciences and engineering data, can be estimated
with reasonable certainty to be economically producible from a given date forward, from known
reservoirs, and under existing economic conditions, operating methods and government regulation before
the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is
reasonably certain, regardless of whether the estimate is a deterministic estimate or probabilistic estimate.
2
Proved developed reserves
Proved reserves that can be expected to be recovered: (a) through existing wells with existing equipment
and operating methods or in which the cost of the required equipment is relatively minor compared with
the cost of a new well or (b) through installed extraction equipment and infrastructure operational at the
time of the reserves estimate if the extraction is by means not involving a well.
Proved undeveloped reserves
Proved reserves that are expected to be recovered from new wells on undrilled acreage, or from existing
wells where a relatively major expenditure is required for recompletion. Reserves on undrilled acreage are
limited to those directly offsetting development spacing areas that are reasonably certain of production
when drilled, unless evidence using reliable technology exists that establishes reasonable certainty of
economic producibility at greater distances. Undrilled locations are classified as having undeveloped
reserves only if a development plan has been adopted indicating that they are scheduled to be drilled
within five years, unless the specific circumstances justify a longer time. Estimates for proved
undeveloped reserves are not attributable to any acreage for which application of fluid injection or other
improved recovery technique is contemplated, unless such techniques have been proved effective by
actual projects in the same reservoir, or by other evidence using reliable technology establishing
reasonable certainty.
Standardized measure
The present value, discounted at 10% per year, of estimated future cash inflows from the production of
proved reserves, computed by applying prices used in estimating proved oil and gas reserves to the year-
end quantities of those reserves (except for consideration of future price changes to the extent provided
by contractual arrangements in existence at year-end), reduced by estimated future development and
production costs, computed by estimating the expenditures to be incurred in developing and producing the
proved oil and gas reserves at the end of the year (including the settlement of asset retirement
obligations), based on year-end costs and assuming continuation of existing economic conditions, further
reduced by estimated future income tax expenses, computed by applying the appropriate year-end
statutory tax rates, with consideration of future tax rates already legislated, to the future pretax net cash
flows relating to the proved oil and gas reserves, less the tax basis of the properties involved and giving
effect to the tax deductions and tax credits and allowances relating to the proved oil and gas reserves.
Revenue interest
An economic interest in production of hydrocarbons from a specified property.
Royalty interest
An interest in the production of a well entitling the owner to a share of production generally free of the
costs of exploration, development and production.
Undeveloped acreage
Lease acreage on which wells have not been drilled or completed to a point that would permit the
production of economic quantities of oil or gas, regardless of whether such acreage contains proved
reserves.
Working interest
A cost-bearing interest under an oil and gas lease that gives the holder the right to develop and produce
the minerals under the lease.
3
Item 1
Business
General
Part I
Penn Virginia Corporation (NYSE: PVA), a Virginia corporation formed in 1882, is an independent oil and gas company engaged
primarily in the exploration, development and production of natural gas and oil in various domestic onshore regions of the United States
including Texas, Appalachia, the Mid-Continent and Mississippi.
Prior to June 2010, we indirectly owned partner interests in Penn Virginia Resource Partners, L.P., or PVR, a publicly traded limited
partnership formed by us in 2001 that was engaged in the coal and natural resource management and natural gas midstream businesses. Our
ownership interests in PVR were held principally through our general and limited partner interests in Penn Virginia GP Holdings, L.P., or
PVG, a publicly traded limited partnership formed by us in 2006. In June 2010, we disposed of our remaining ownership interests in PVG
and, indirectly, our interests in PVR. This divestiture completed the process of our transformation into a “pure play” exploration and
production (E&P) company. Our Consolidated Financial Statements and Notes present our former interests in PVG as discontinued
operations.
Unless the context requires otherwise, references to the “Company,” “Penn Virginia,” “we,” “us” or “our” in this Annual Report on
Form 10-K refer to Penn Virginia Corporation and its subsidiaries.
Description of Business
Business Overview
Having completed our transformation to a “pure play” E&P company, we are now focusing our efforts on oil and NGL investment
opportunities rather than natural gas. During 2011, we grew our oil and NGL production to 28% (37% for the 4th quarter of 2011) of our
total production, an increase of approximately 59% over 2010, and we invested approximately $390 million in oil and NGL-related capital
projects. These investments have yielded higher cash flows and margins that more than offset the decline in production volumes and
realized prices from our natural gas production assets. We expect our oil and NGL production to continue to grow as a percentage of our
total production as we pursue higher rate-of-return projects in economically attractive oil and NGL-rich areas.
As of December 31, 2011, our proved reserves were approximately 883 Bcfe, of which 49% were proved developed reserves. Our
operations currently include primarily unconventional developmental drilling opportunities and exploratory prospects. We believe our
emerging presence in the Eagle Ford Shale provides us opportunities for continued oil and NGL-focused investments over the next several
years.
Our proved reserves and primary development plays are located in Texas, Appalachia, the Mid-Continent and Mississippi, which
comprised 53%, 17%, 11% and 19% of our total proved reserves as of December 31, 2011. In 2011, our production totaled 46.6 Bcfe,
compared to 47.2 Bcfe in 2010. Texas, Appalachia, the Mid-Continent and Mississippi comprised 38%, 20%, 28% and 14% of total
production volumes during 2011. In the three years ended December 31, 2011, we drilled 156 gross (105.0 net) wells, of which 92% were
productive wells. For a more detailed discussion of our reserves and production, see Item 2, “Properties.”
In 2011, our capital expenditures were $446.7 million, of which $307.8 million, or 69%, was related to development drilling, $64.1
million, or 14%, was related to exploratory drilling and $50.0 million, or 11%, was related to leasehold acquisitions. The remaining $24.8
million, or 6%, was related to pipelines, gathering and facilities.
As of December 31, 2011, we owned approximately 1.1 million net acres of leasehold and royalty interests, approximately 29% of
which were undeveloped. Many of our proved undeveloped locations and additional potential drilling locations are direct offsets or
extensions from existing production. We believe we have several years of drilling opportunities on our existing undeveloped acreage based
on our historical drilling rate.
Business Strategy
We intend to pursue the following business strategies:
•
•
•
Continue our “Gas-to-Oil” transition. We anticipate oil and NGL production will provide approximately 42% of our total 2012
production, which is an increase of approximately 26% to 42% over our total 2011 oil and NGL production. Our planned 2012
capital projects are focused on oil and NGL exploration and development.
Grow our cash flows and margins. We expect our operating cash flows and margins will continue to grow as we increase our oil
and NGL production through investment in higher rate-of-return development oil projects.
Expand oil and NGL reserves and drilling inventory. We anticipate spending up to approximately $325 million on oil and gas
capital expenditures in 2012. We plan to allocate up to $245 million, or approximately 75% of this amount, to development
drilling and related projects, primarily on our Eagle Ford Shale acreage in Gonzales County, Texas. We anticipate allocating the
remaining $80 million, or approximately 25%, of our oil and gas capital expenditures to exploratory drilling projects in the Eagle
Ford Shale and Mid-Continent region including our recently announced agreement to jointly explore approximately 13,000 gross
acres of the Eagle Ford Shale in Lavaca County, Texas.
4
•
•
•
Improve our liquidity and financial position. We expect to continue to use our operating cash flows and borrowings under our
Revolver to fund our capital requirements in 2012. We expect to supplement these sources of liquidity with proceeds from the
sale of non-core assets or by accessing the capital markets. Our Revolver provides for a maximum leverage of up to 4.5 times
EBITDAX (as defined in the Revolver) through June 2013 and 4.0 times EBITDAX thereafter through its maturity in August
2016. We have no material debt maturities until 2016.
Pursue selective divestitures of non-core assets to increase margins, operational focus and liquidity. Certain of our natural gas
assets no longer represent core activities. We may dispose of certain of these assets and reinvest the proceeds into our oil and
NGL-focused projects.
Retain long-term optionality of our core natural gas assets. We maintain substantial natural gas properties, particularly in the
Haynesville Shale and Cotton Valley Sands in East Texas and in the Selma Chalk in Mississippi, which are largely held by
production. We plan to retain these assets, which provide us with the option to increase development in these regions when
natural gas prices improve.
• Manage risk exposure through an active hedging program. We actively manage our exposure to commodity price fluctuations by
hedging the commodity price risk for our expected production. The level of our hedging activity and duration of the instruments
employed depend upon our cash flow at risk, available hedge prices and our operating strategy. For 2012, we have hedged
approximately 47% of our estimated oil production at average floor/swap and ceiling prices of $97.08 and $99.61 per barrel. In
addition, we have hedged approximately 32% of our estimated natural gas production at a weighted-average floor/swap price of
$5.43 per MMBtu and ceiling price of $6.05 per MMBtu.
Contracts
Transportation
We have entered into contracts that provide firm transportation capacity rights for specified volumes per day on various pipeline
systems for terms ranging from one to 15 years. The contracts require us to pay transportation demand charges regardless of the amount of
pipeline capacity we use. We may sell excess capacity to third parties at our discretion.
Marketing
We generally sell our natural gas, oil and NGL products using short-term floating price physical and spot market contracts. For the
year ended December 31, 2011, approximately 58% of our consolidated product revenue was attributable to five of our customers: Connect
Energy Services, LLC, a subsidiary of PVR; Enogex, LLC; Chesapeake Operating, Inc.; Plains Marketing LP; and Shell Trading (US)
Company.
Commodity Derivative Contracts
We generally utilize collar, swap and swaption derivative contracts, among others, to hedge against the variability in cash flows
associated with anticipated sales of our future oil and gas production. While the use of derivative instruments limits the risk of adverse
price movements, such use may also limit future revenues from favorable price movements.
The counterparty to a collar or swap contract is required to make a payment to us if the settlement price for any settlement period is
below the floor or swap price for such contract. We are required to make a payment to the counterparty if the settlement price for any
settlement period is above the ceiling or swap price for such contract. Neither party is required to make a payment to the other party if the
settlement price for any settlement period is equal to or greater than the floor price and equal to or less than the ceiling price for such
contract. A swaption contract gives our counterparties the option to enter into a fixed price swap with us at a future date. If the forward
commodity price for the term of the swaption is higher than or equal to the swaption strike price on the exercise date, the counterparty will
exercise its option to enter into a fixed price swap at the swaption strike price for the term of the swaption, at which point the contract
functions as a fixed price swap. If the forward commodity price for the term of the swaption is lower than the swaption strike price on the
exercise date, the option expires and no fixed price swap is in effect.
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.
Competition
The oil and natural gas industry is very competitive, and we compete with a substantial number of other companies that are large,
well-established and have greater financial and operational resources than we do, which may adversely affect our ability to compete or
grow our business. Many such companies not only engage in the acquisition, exploration, development and production of oil and natural
gas reserves, but also carry on refining operations, electricity generation and the marketing of refined products. Competition is particularly
intense in the acquisition of prospective oil and natural gas properties. We may incur higher costs or be unable to acquire and develop
desirable properties at costs we consider reasonable because of this competition. We compete with other oil and natural gas companies to
secure drilling rigs and other equipment necessary for the drilling and completion of wells and in recruiting and retaining of qualified
personnel. Such equipment and labor may be in short supply from time to time. Shortages of equipment, labor or materials may result in
increased costs or the inability to obtain such resources as needed. We also compete with substantially larger oil and gas companies in the
marketing and sale of oil and natural gas, and the oil and natural gas industry in general competes with other industries supplying energy
and fuel to industrial, commercial and individual consumers.
5
Government Regulation and Environmental Matters
Our operations are subject to stringent and extensive federal, state and local laws and regulations governing the discharge of materials
into the environment or otherwise relating to the protection of the environment. Failure to comply with these laws and regulations may
result in the assessment of substantial administrative, civil and criminal penalties, as well as the issuance of injunctions limiting or
prohibiting our activities. Compliance with these laws and regulations increases our cost of doing business. Also, environmental laws and
regulations have been subject to frequent changes over the years and the imposition of more stringent requirements, including any
significant limitation on hydraulic fracturing, could have a material adverse effect on our financial condition and results of operations.
The following is a summary of the significant environmental laws to which our business operations are subject.
CERCLA. The Comprehensive Environmental Response, Compensation, and Liability Act, or CERCLA, is also known as the
“Superfund” law. CERCLA and comparable state laws impose liability, without regard to fault or the legality of the original conduct, on
parties that are considered to have contributed to the release of a “hazardous substance” into the environment. Such “responsible parties”
may be subject to joint and several liability under CERCLA for the costs of cleaning up the hazardous substances that have been released
into the environment and for damages to natural resources. It is not uncommon for neighboring landowners and other third parties to file
claims for personal injury and property damage allegedly caused by the hazardous substances released into the environment. We currently
own or lease properties that have been used for the exploration and production of oil and natural gas for a number of years. Many of these
properties have been operated by third parties whose treatment or release of hydrocarbons or other wastes was not under our control. These
properties, and any wastes that may have been released on them, may be subject to CERCLA, and we could potentially be required to
investigate and remediate such properties, including soil or groundwater contamination by prior owners or operators, or to perform
remedial plugging or pit closure operations to prevent future contamination.
RCRA. The Resource Conservation and Recovery Act, or the RCRA, and comparable state statutes regulate the generation,
transportation, treatment, storage, disposal and clean up of hazardous and non-hazardous wastes. Under the auspices of the United States
Environmental Protection Agency, or the EPA, the individual states administer some or all of the provisions of RCRA. While there is
currently an exclusion from RCRA for drilling fluids, produced waters and most of the other wastes associated with the exploration and
production of oil or natural gas, it is possible that some of these wastes could be classified as hazardous waste in the future, and therefore be
subject to RCRA.
Oil Pollution Act. The Oil Pollution Act of 1990, as amended, or the OPA, contains numerous restrictions relating to the prevention
of and response to oil spills into waters of the United States. The term “waters of the United States” has been interpreted broadly to include
inland water bodies, including wetlands and intermittent streams. OPA subjects owners of facilities to strict, joint and several liability for
all containment and clean up costs, and certain other damages arising from a spill.
Clean Water Act. The Federal Water Pollution Control Act, or the Clean Water Act, governs the discharge of certain pollutants into
waters of the United States. The discharge of pollutants into regulated waters without a permit issued by the EPA or the state is prohibited.
The Clean Water Act also requires the preparation and implementation of Spill Prevention, Control and Countermeasure Plans in
connection with on-site storage of significant quantities of oil. Notably, in Pennsylvania, wastewater from the hydraulic fracturing process
can no longer be sent to publicly owned treatment works directly. New wastewater discharges must be treated at a centralized waste
treatment facility and comply with certain Total Dissolved Solids standards prior to being discharged to publicly owned treatment works.
This restriction of disposal options for hydraulic fracturing waste may result in increased costs. The EPA is currently developing analogous
pretreatment standards on the federal level.
Safe Drinking Water Act. The Safe Drinking Water Act, or the SDWA, and the Underground Injection Control Program promulgated
under the SDWA, establish the requirements for salt water disposal well activities and prohibit the migration of fluid containing
contaminants into underground sources of drinking water. We engage third parties to provide hydraulic fracturing or other well stimulation
services to us in connection with the wells in which we act as operator. Hydraulic fracturing is an important and commonly used process in
the completion of oil and gas wells, particularly in unconventional plays like the Eagle Ford Shale, Granite Wash, Haynesville Shale and
the Marcellus Shale formations. The U.S. Congress is currently considering the Fracturing Responsibility and Awareness of Chemicals Act
to subject hydraulic fracturing operations to federal regulation and to require the disclosure of chemicals used by us and others in the oil and
gas industry in the hydraulic fracturing process. Sponsors of bills currently pending before the U.S. Senate and House of Representatives
have asserted that chemicals used in the fracturing process could adversely affect drinking water supplies. Proposed legislation would
require, among other things, the reporting and public disclosure of chemicals used in the fracturing process, which could make it easier for
third parties opposing the hydraulic fracturing process to initiate legal proceedings against producers and service providers. In addition,
these bills, if adopted, could establish an additional level of regulation and permitting of hydraulic fracturing operations at the federal level,
which could lead to operational delays, increased operating and compliance costs and additional regulatory burdens that could make it more
difficult or commercially impracticable for us to perform hydraulic fracturing. Such costs and burdens could delay the development of
unconventional gas resources from shale formations, which are not commercial without the use of hydraulic fracturing. Additionally, the
EPA has commenced a comprehensive research study to investigate the potential adverse environmental impacts of hydraulic fracturing,
including on water quality and public health, and a committee of the U.S. House of Representatives is also conducting an investigation into
hydraulic fracturing practices. The initial EPA study results are expected to be available in late 2012.
6
Further, in light of the explosion and fire on the drilling rig Deepwater Horizon in the Gulf of Mexico, as well as recent incidents
involving the release of natural gas and fluids as a result of drilling activities in the Marcellus Shale, there have been a variety of regulatory
initiatives at both the federal and state levels to restrict oil and gas drilling operations in certain locations. For example, Pennsylvania has
instituted a moratorium on leasing forest land for gas drilling. Additionally, the New York State Department of Environmental
Conservation, or NYDEC, has ceased issuing drilling permits for horizontal drilling under the General Environmental Impact Statement,
pending completion of the Supplemental General Environmental Impact Statement, or SGEIS, that takes into account the impacts of high
volume hydraulic fracturing. However, the NYDEC has stated that it will consider individual, site-specific environmental reviews for any
entity that wishes to proceed with a permit application as long as that review is of similar scope and depth as the SGEIS. We use hydraulic
fracturing extensively and any increased federal, state, or local regulation of hydraulic fracturing could reduce the volumes of oil and
natural gas that we can economically recover.
Certain states in which we operate have adopted regulations requiring the disclosure of chemicals used in the hydraulic fracturing
process. For instance, Texas, Pennsylvania and West Virginia have implemented chemical disclosure requirements for hydraulic fracturing
operations. We currently disclose all hydraulic fracturing additives we use on www.FracFocus.org, a website created by the Ground Water
Protection Council and Interstate Oil and Gas Compact Commission. In addition to chemical disclosure rules, some states have
implemented permitting, well construction or water withdrawal regulations that may increase the costs of hydraulic fracturing operations.
Clean Air Act. Our operations are subject to the Clean Air Act, or the CAA, and comparable state and local requirements. In 1990,
the U.S. Congress adopted amendments to the CAA containing provisions that have resulted in the gradual imposition of certain pollution
control requirements with respect to air emissions from our operations. The EPA and states have developed, and continue to develop,
regulations to implement these requirements. We may be required to incur certain capital expenditures in the next several years for air
pollution control equipment in connection with maintaining or obtaining operating permits and approvals addressing other air emission-
related issues. Further, stricter requirements could negatively impact our production and operations. For example, the Texas Commission
on Environmental Quality and the Railroad Commission of Texas have been evaluating possible additional regulation of air emissions in
response to concerns about allegedly high concentrations of benzene in the air near drilling sites and natural gas processing facilities. These
initiatives could lead to more stringent air permitting, increased regulation and possible enforcement actions at the local, state and federal
levels.
Additionally, on July 28, 2011, the EPA issued proposed rules that would subject all oil and gas operations (production, processing,
transmission, storage and distribution) to regulation under the New Source Performance Standards, or NSPS, and National Emission
Standards for Hazardous Air Pollutants, or NESHAPS, programs. The EPA published these proposed regulations to comply with a consent
decree which required publication of proposed standards on or before July 28, 2011, and promulgation of final standards on or before April
3, 2012. The new rules would regulate emissions from several types of emission sources that have never before been subject to federal
standards, and also include NSPS standards for completion of hydraulically fractured gas wells. The standards would apply to newly drilled
and fractured wells, as well as existing wells that are refractured. The proposed NESHAPS regulations would apply to certain major
sources of hazardous air pollutants not currently subject to Maximum Achievable Control Technology, or MACT, standards. We are
currently researching the effect these proposed rules could have on our business, but generally expect them to add to the cost and expense
of our operations.
There have been recent claims asserted that individual wells and other facilities should be “aggregated” together and their collective
emissions considered in determining whether major source permitting requirements apply under the CAA. Were we required to aggregate
individual wells and other facilities, it could bring us within the ambit of the Title V permitting program, as well as consideration as a
major source for MACT applicability.
Increased regulation of and attention given by environmental interest groups, as well as state and federal regulatory authorities, to
the hydraulic fracturing process could lead to greater opposition to oil and gas production activities using hydraulic fracturing techniques.
Additional legislation or regulation could also lead to operational delays or increased operating costs in the production of oil and natural
gas, including from the developing shale plays, or could make it more difficult to perform hydraulic fracturing. These developments could
also lead to litigation challenging proposed or operating wells. The adoption of federal, state or local laws or the implementation of
regulations regarding hydraulic fracturing that are more stringent could cause a decrease in the completion of new oil and gas wells, as well
as increased compliance costs and time, which could adversely affect our financial position, results of operations and cash flows.
7
Greenhouse Gas Emissions. Both in the United States and worldwide, there is increasing attention being paid to the issue of
climate change and the contributing effect of greenhouse gas, or GHG, emissions. On June 28, 2010, the EPA issued the “Final Mandatory
Reporting of Greenhouse Gases” Rule, or the Reporting Rule, requiring all stationary sources that emit more than 25,000 tons of
greenhouse gases per year to collect and report to the EPA data regarding such emissions. The Reporting Rule establishes a new
comprehensive scheme, beginning in 2011, requiring operators of stationary sources emitting more than established annual thresholds of
carbon dioxide-equivalent GHGs to inventory and report their GHG emissions occurring in the prior calendar year on a facility-by-facility
basis. On November 9, 2010, the EPA issued final rules applying these regulations to the oil and gas source category, including oil and
natural gas production, natural gas processing, transmission, distribution and storage facilities (Subpart W). This action does not require
control of GHGs. However, the EPA has indicated that it will use data collected through the reporting rules to decide whether to
promulgate future GHG limits.
In addition, in 2009, the EPA issued a final rule known as the EPA’s Endangerment Finding, finding that current and projected
concentrations of six key GHGs in the atmosphere threaten public health and the environment, as well as the welfare of current and future
generations. Legal challenges to these findings have been asserted, and the U.S. Congress is considering legislation to delay or repeal the
EPA’s actions, but we cannot predict the outcome of this litigation or these efforts. The EPA has begun adopting and implementing
regulations to restrict emissions of GHGs under existing provisions of the CAA. These rules are currently subject to judicial challenge, but
the D.C. Circuit has refused to stay their implementation while the challenges are pending.
As of July 1, 2011, the EPA requires facilities that must already obtain New Source Review permits for other pollutants to include
GHGs in their permits for new construction projects that emit at least 100,000 tons per year of GHGs and existing facilities that increase
their emissions by at least 75,000 tons per year. In December 2010, the EPA issued its plan to update pollution standards for fossil fuel
power plants and petroleum refineries. The EPA had stated that it intended to propose standards for power plants in July 2011 and for
refineries in December 2011 and issue final standards in May 2012 and November 2012, respectively. As of early December 2011, the EPA
reportedly has prepared a proposal to regulate GHG emissions from only new plants, not existing ones, but that proposal is pending review
at the Office of Management and Budget, and is not yet public. The EPA’s failure to propose rules by the required date will delay final
action, as well.
Also, many states and regions have adopted GHG initiatives and certain governmental bodies have or are considering the imposition
of fees or taxes based on the emission of GHGs by certain facilities.
The U.S. Congress has considered a number of legislative proposals to restrict GHG emissions. It presently appears unlikely that
comprehensive climate legislation will be passed by either house of the U.S. Congress in the near future, although energy legislation and
other initiatives continue to be proposed that may be relevant to GHG emissions issues. In addition, various states, either individually or as
part of regional initiatives, have begun taking actions to control and/or reduce GHG emissions. While it is not possible at this time to predict
how regulation that may be enacted to address GHG emissions would impact our business, the modification of existing laws or regulations,
or the adoption of new laws or regulations curtailing oil and gas exploration in the areas of the United States in which we operate could
affect our operations by limiting drilling opportunities or imposing materially increased costs. In addition, existing or new laws, regulations
or treaties (including incentives to conserve energy or use alternative energy sources) could have a negative impact on our business if such
incentives reduce demand for oil and gas.
Finally, it should be noted that some scientists have concluded that increasing concentrations of GHGs in the Earth's atmosphere may
produce climate changes that have significant physical effects, such as increased frequency and severity of storms, floods and other
climatic events; if any such effects were to occur, they could have an adverse effect on our operations.
OSHA. We are subject to the requirements of the Occupational Safety and Health Act, or OSHA, and comparable state laws that
regulate the protection of the health and safety of workers. In addition, the OSHA hazard communication standard requires maintenance of
information about hazardous materials used or produced in operations, and the provision of such information to employees, state and local
government authorities and citizens. Other OSHA standards regulate specific worker safety aspects of our operations.
Endangered Species Act. The Endangered Species Act and analogous state laws regulate activities that could have an adverse effect
on threatened or endangered species.
Employees and Labor Relations
We and our subsidiaries had a total of 153 employees as of December 31, 2011. We consider our current employee relations to be
favorable. We and our employees are not subject to any collective bargaining agreements.
Available Information
Our internet address is http://www.pennvirginia.com. We make available free of charge on or through our website our Corporate
Governance Principles, Code of Business Conduct and Ethics, Executive and Financial Officer Code of Ethics, Audit Committee Charter,
Compensation and Benefits Committee Charter and Nominating and Governance Committee Charter, and we will provide copies of such
documents to any shareholder who so requests. We also make available free of charge on or through our website our Annual Report on
Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after we electronically file such material with, or
furnish it to, the SEC.
All references in this Annual Report on Form 10-K to the “NYSE” refer to the New York Stock Exchange, and all references to the
“SEC” refer to the Securities and Exchange Commission.
8
Item 1A
Risk Factors
Our business and operations are subject to a number of risks and uncertainties as described below. However, the risks and
uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we may
currently deem immaterial, may become important factors that harm our business, financial condition or results of operations. If any of the
following risks actually occur, our business, financial condition or results of operations could suffer.
Natural gas and crude oil prices are volatile, and a substantial or extended decline in prices would hurt our profitability and financial
condition.
Our revenues, operating results, cash flows, profitability, future rate of growth and the carrying value of our oil and gas properties
depend heavily on prevailing market prices for natural gas, crude oil and NGLs. Historically, gas and oil prices have been volatile, and they
are likely to continue to be volatile. Wide fluctuations in natural gas, crude oil and NGL prices may result from relatively minor changes in
the supply of and demand for gas and oil, market demand and other factors that are beyond our control, including:
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domestic and foreign supplies of oil, natural gas and NGLs;
political and economic conditions in oil or gas producing regions;
overall domestic and foreign economic conditions;
prices and availability of and demand for, alternative fuels;
the availability of transportation facilities;
weather conditions; and
domestic and foreign governmental regulation.
Some of our projections and estimates are based on assumptions as to the future prices of gas and oil. These price assumptions are
used for planning purposes. We expect our assumptions will change over time and that actual prices in the future will likely differ from our
estimates. Any substantial or extended decline in the actual prices of natural gas or crude oil would have a material adverse effect on our
business, financial position and results of operations (including reduced cash flows, borrowing capacity and possible asset impairment), the
quantities of gas and oil reserves that we can economically produce, the quantity of estimated proved reserves that may be attributed to our
properties and our ability to fund our capital program.
Our future performance depends on our ability to find or acquire additional oil and gas reserves that are economically recoverable.
Unless we successfully replace the reserves that we produce, our reserves will decline, eventually resulting in a decrease in oil and
gas production and lower revenues and cash flows from operations. We have historically succeeded in substantially replacing reserves
primarily through exploration and development and, to a lesser extent, acquisitions. We have conducted such activities on our existing oil
and gas properties as well as on newly acquired properties. We may not be able to continue to replace reserves from such activities at
acceptable costs. Currently depressed gas prices may further limit the types of reserves that can be developed at acceptable costs. Lower
prices also decrease our cash flows and may cause us to reduce capital expenditures. The business of exploring for, developing or acquiring
reserves is capital intensive. We may not be able to make the necessary capital investments to maintain or expand our oil and gas reserves if
cash flows from operations are reduced and external sources of capital are limited. In addition, exploration and development activities
involve numerous risks that may result in dry holes, the failure to produce oil and gas in commercial quantities and the inability to fully
produce discovered reserves.
We are continually identifying and evaluating acquisition opportunities. However, competition for producing oil and gas properties is
intense and many of our competitors have financial and other resources substantially greater than those available to us. In the event we are
successful in completing an acquisition, we cannot ensure that such acquisition will consist of properties that contain economically
recoverable reserves or that such acquisition will be profitably integrated into our operations.
We may not be able to fund our planned capital expenditures.
We make, and will continue to make, substantial capital expenditures to find, acquire, develop and produce oil and natural gas
reserves. In 2012, we anticipate making capital expenditures, excluding acquisitions, of up to approximately $325 million.
If oil prices decrease, gas prices fail to recover or we encounter operating difficulties that result in our cash flow from operations
being less than expected, we may have to reduce the capital we can spend unless we have borrowing capacity under our Revolver, or we
can raise additional funds through asset sales or a debt or equity financing.
9
Future cash flows and the availability of financing will also be subject to a number of variables, such as our success in locating and
producing new reserves, the level of production from existing wells and prices of oil and natural gas.
If our revenues were to decrease due to lower oil and gas prices, decreased production or other reasons, and if we could not obtain
capital through the Revolver, or otherwise on acceptable terms, our ability to execute our development plans, replace our reserves or
maintain production levels could be greatly limited.
The borrowing base under our Revolver may be reduced in the future if commodity prices decline.
The borrowing base under our Revolver is $380 million as of December 31, 2011. Our borrowing base is re-determined twice a year
and is scheduled to be redetermined during April 2012. Due primarily to depressed natural gas prices and a decrease in our proved
developed reserves, we anticipate that the borrowing base may be materially reduced. As a result, we may be unable to obtain adequate
funding under our Revolver. If funding is not available when or in the amounts needed, or is available only on unfavorable terms, it might
adversely affect our development plan as currently anticipated and our ability to make new acquisitions, each of which could have a
material adverse effect on our production, financial condition and results of operations.
Exploration and development drilling may not result in commercially productive reserves.
Oil and gas drilling and production activities are subject to numerous risks, including the risk that no commercially productive natural
gas or oil reserves will be found. The costs of drilling, completing and operating wells are often uncertain, and drilling operations may be
curtailed, delayed or canceled as a result of a variety of factors, many of which are beyond our control. These factors include:
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unexpected drilling conditions;
pressure or irregularities in formations;
equipment failures or accidents;
costs of, or shortages or delays in the availability of, drilling rigs, equipment and materials;
shortages in experienced labor;
failure to or delays in securing necessary regulatory approvals and permits, including delays due to potential hydraulic fracturing
regulations;
title problems;
fires, explosions, blow-outs and surface cratering; and
adverse weather conditions.
The prevailing prices of oil and gas also affect the cost of and the demand for drilling rigs, production equipment and related
services. The availability of drilling rigs and equipment can vary significantly from region to region at any particular time. Although land
drilling rigs can be moved from one region to another in response to changes in levels of demand, an undersupply of rigs in any region may
result in drilling delays and higher drilling costs for the rigs that are available in that region.
The wells we drill may not be productive and we may not recover all or any portion of our investment in such wells. The seismic data
and other technologies we use do not allow us to know conclusively prior to drilling a well that natural gas or oil is present or may be
produced economically. The cost of drilling, completing and operating a well is often uncertain, and cost factors can adversely affect the
economics of a project. In addition, limitations on the use of hydraulic fracturing could have an adverse affect on our ability to develop and
produce oil and gas from new wells, which would reduce our rate of return on these wells and our cash flows. Drilling activities can result
in dry wells or wells that are productive but do not produce sufficient net revenues after operating and other costs to cover initial drilling
costs.
Our future drilling activities may not be successful, nor can we be sure that our overall drilling success rate or our drilling success rate
within a particular area will not decline. Unsuccessful drilling activities could have a material adverse effect on our business, financial
condition and results of operations. Also, we may not be able to obtain any options or lease rights in potential drilling locations that we
identify. Although we have identified numerous potential drilling locations, we may not be able to economically produce oil or natural gas
from all of them.
We are exposed to the credit risk of our customers and joint interest partners, and nonpayment or nonperformance by these parties would
reduce our cash flows.
We are subject to risk from loss resulting from our customers’ and joint interest partners’ nonperformance or nonpayment. We
depend on a limited number of customers for a significant portion of revenues. In 2011, 58% of our total consolidated product revenues
resulted from five of our customers. Any nonpayment or nonperformance by our customers would reduce our cash flows.
10
Our business involves many operating risks, including hydraulic fracturing, that may result in substantial losses for which insurance may
be unavailable or inadequate.
Our operations are subject to all of the risks and hazards typically associated with the exploitation, development and exploration for
and the production and transportation of oil and natural gas, including well stimulation and completion activities such as hydraulic
fracturing. These operating risks include:
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fires, explosions, blowouts, cratering and casing collapses;
formations with abnormal pressures;
pipeline ruptures or spills;
uncontrollable flows of oil, natural gas or well fluids;
• migration of fracturing fluids into surrounding groundwater;
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spills or releases of fracturing fluids including from trucks sometimes used to deliver these materials;
spills or releases of brine or other produced water that may go off-site;
subsurface conditions that prevent us from (i) stimulating the planned number of stages, (ii) accessing the entirety of the
wellbore with our tools during completion or (iii) removing all fracturing materials from the wellbore to allow production to
begin;
environmental hazards such as natural gas leaks, oil spills and discharges of toxic gases;
personal injuries and death; and
natural disasters.
Any of these risks could result in substantial losses resulting from injury or loss of life, damage to or destruction of property, natural
resources and equipment, pollution and other environmental damages, clean-up responsibilities, regulatory investigations and penalties and
suspension of operations. In addition, under certain circumstances, we may be liable for environmental damage caused by previous owners
or operators of properties that we own, lease or operate. As a result, we may incur substantial liabilities to third parties or governmental
entities, which could reduce or eliminate funds available for exploration, development or acquisitions or cause us to incur losses.
If we experience any of these problems with well stimulation and completion activities, such as hydraulic fracturing, our ability to
explore for and produce natural gas or oil may be adversely affected. We could incur substantial losses or otherwise fail to realize reserves
in particular formations as a result of:
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the need to shutdown, abandon and relocate drilling operations;
the need to sample, test and monitor drinking water in particular areas and to provide filtration or other drinking water supplies
to users of water supplies that may have been impacted or threatened by potential contamination from fracturing fluids;
the need to modify drill sites to ensure there are no spills or releases off-site and to investigate and/or remediate any spills or
releases that might have occurred; and
suspension of our operations.
In accordance with industry practice, we maintain insurance at a level that balances the cost of insurance with our assessment of the
risk and our ability to achieve a reasonable rate of return on our investments. We cannot assure you that our insurance will be adequate to
cover losses or liabilities. Also, we cannot predict the continued availability of insurance at premium levels that justify its purchase. The
occurrence of a significant event, not fully insured or indemnified against, could have a material adverse effect on our business, financial
condition and results of operations.
Our business depends on transportation facilities owned by others.
We deliver substantially all of our oil and natural gas production through pipelines that we do not own. The marketability of our
production depends upon the availability, proximity and capacity of these pipelines as well as gathering systems and processing facilities.
The unavailability or lack of available capacity on these systems and facilities could result in the shut-in of producing wells or the delay or
discontinuance of development plans for properties. Federal, state and local regulation of oil and natural gas production and transportation,
tax and energy policies, changes in supply and demand, pipeline pressures, damage to or destruction of pipelines and general economic
conditions could adversely affect our ability to produce, gather and market our oil and natural gas.
11
Estimates of oil and natural gas reserves are not precise.
This Annual Report on Form 10-K contains estimates of our proved oil and gas reserves and the estimated future net cash flows from
such reserves. These estimates are based upon various assumptions, including assumptions required by the SEC relating to oil and natural
gas prices, drilling and operating expenses, capital expenditures, taxes and availability of funds. The process of estimating oil and natural
gas reserves is complex. This process requires significant decisions and assumptions in the evaluation of available geological, geophysical,
engineering and economic data for each reservoir. These estimates are dependent on many variables and, therefore, changes often occur as
these variables evolve and commodity prices fluctuate. Any material inaccuracies in these reserve estimates or underlying assumptions
could materially affect the estimated quantities and present value of our reserves.
Actual future production, oil and gas prices, revenues, taxes, development expenditures, operating expenses and quantities of
recoverable oil and gas reserves will most likely vary from those estimated. Any significant variance could materially affect the estimated
quantities and present value of reserves disclosed by us. In addition, we may adjust estimates of proved reserves to reflect production
history, results of exploration and development, prevailing oil and gas prices and other factors, many of which are beyond our control.
At December 31, 2011, approximately 51% of our estimated proved reserves were proved undeveloped. Estimation of proved
undeveloped reserves and proved developed non-producing reserves is based on volumetric calculations and adjacent reserve performance
data. Recovery of proved undeveloped reserves requires significant capital expenditures and successful drilling operations. Production
revenues from proved developed non-producing reserves will not be realized until some time in the future. The reserve data assumes that
we will make significant capital expenditures to develop our reserves. Although we have prepared estimates of our reserves and the costs
associated with these reserves in accordance with industry standards, these estimated costs may not be accurate, development may not occur
as scheduled and actual results may not occur as estimated.
You should not assume that the present value of estimated future net cash flows (standardized measure) referred to herein is the
current fair value of our estimated oil and gas reserves. In accordance with SEC requirements, we base the estimated discounted future net
cash flows from our proved reserves on prices and costs on the date of the estimate. Actual current and future prices and costs may be
materially higher or lower than the prices and costs as of the date of the estimate. As a result, net present value estimates using actual
prices and costs may be significantly less than the SEC estimate that is provided herein. In addition, the 10% discount factor, which is
required by the SEC to be used in calculating discounted future net cash flows for reporting purposes, is not necessarily the most accurate
discount factor for us.
We may record impairment losses on our oil and gas properties.
Quantities of proved reserves are estimated based on economic conditions in existence in the period of assessment. Lower oil and gas
prices may have the impact of shortening the economic lives on certain fields because it becomes uneconomic to produce all recoverable
reserves on such fields, thus reducing proved property reserve estimates. If such revisions in the estimated quantities of proved reserves
occur, it will have the effect of increasing the rates of depreciation, depletion and amortization, or DD&A, on the affected properties,
which would decrease earnings or result in losses through higher DD&A expense. The revisions may also be sufficient enough to cause
impairment losses on certain properties that would result in a further non-cash charge to reported earnings.
GAAP requires that the carrying value of oil and gas properties be reviewed on a periodic basis for possible impairment. An
impairment charge is recognized when the carrying value of oil and gas properties is greater than the undiscounted future net cash flows
attributable to the property. In addition to revisions to reserves and the impact of lower commodity prices, impairments may occur due to
increases in estimated operating and development costs. During the past several years, we have been required to impair certain of our oil
and gas properties and related assets. If natural gas, crude oil and NGL prices decline or we drill uneconomic wells, it is reasonably
possible that we will have to record a significant impairment in the future. While an impairment charge reflects our ability to recover the
carrying value of our investments, it does not impact our cash flows from operating activities.
We have limited control over the activities on properties we do not operate.
In 2011, other companies operated approximately 23% of our net production. Our success in properties operated by others will
depend upon a number of factors outside of our control, including timing and amount of capital expenditures, the operator’s expertise and
financial resources, approval of other participants in drilling wells, selection of technology and maintenance of safety and environmental
standards. We have limited ability to influence or control the operation or future development of these non-operated properties or the
amount of capital expenditures that we are required to fund for their operation. Our dependence on the operator and other working interest
owners for these projects and our limited ability to influence or control the operation and future development of these properties could have
a material adverse effect on the realization of our targeted returns or lead to unexpected future costs.
Certain working interest owners in our properties have the right to control the timing of drilling activities on our properties under certain
circumstances.
Under certain circumstances, certain of the other working interest owners in our properties have the right to limit the amount of
drilling activities that can take place on our properties at any given time. If these working interest owners chose to exercise this right, we
could be required to scale back anticipated drilling activities on the affected properties. In such an event, production from the affected
properties would be deferred, thereby decreasing production from the properties in the short-term.
12
Our producing property acquisitions carry significant risks.
Acquisition of producing oil and gas properties is a key element of maintaining and growing reserves and production. Competition for
these assets has been and will continue to be intense. In the event we do complete an acquisition, its success will depend on a number of
factors, many of which are beyond our control. These factors include the purchase price, future oil and gas prices, the ability to reasonably
estimate or assess the recoverable volumes of reserves, rates of future production and future net revenues attainable from reserves, future
operating and capital costs, results of future exploration, exploitation and development activities on the acquired properties and future
abandonment and possible future environmental or other liabilities. There are numerous uncertainties inherent in estimating quantities of
proved oil and gas reserves, actual future production rates and associated costs and potential liabilities with respect to prospective
acquisition targets. Actual results may vary substantially from those assumed in the estimates. A customary review of subject properties
will not necessarily reveal all existing or potential problems.
Additionally, significant acquisitions can change the nature of our operations and business depending upon the character of the
acquired properties if they have substantially different operating and geological characteristics or are in different geographic locations than
our existing properties. To the extent that acquired properties are substantially different than our existing properties, our ability to
efficiently realize the expected economic benefits of such transactions may be limited.
Integrating acquired businesses and properties involves a number of special risks. These risks include the possibility that
management may be distracted from regular business concerns by the need to integrate operations and systems and that unforeseen
difficulties can arise in integrating operations and systems and in retaining and assimilating employees. Any of these or other similar risks
could lead to potential adverse short-term or long-term effects on our operating results, and may cause us to not be able to realize any or all
of the anticipated benefits of the acquisitions.
We are subject to complex laws and regulations that can adversely affect the cost, manner or feasibility of doing business.
Exploration, development, production and sale of oil and gas are subject to extensive federal, state and local laws and regulations,
including complex environmental laws. Future laws or regulations, any adverse changes in the interpretation of existing laws and
regulations, inability to obtain necessary regulatory approvals or a failure to comply with existing legal requirements may harm our
business, results of operations or financial condition. We may be required to make large expenditures to comply with environmental and
other governmental regulations. Failure to comply with these laws and regulations may result in the suspension or termination of operations
and subject us to administrative, civil and criminal penalties. Matters subject to regulation include discharge permits for drilling operations,
drilling bonds, spacing of wells, unitization and pooling of properties, environmental protection and taxation. Our operations create the risk
of environmental liabilities to the government or third parties for any unlawful discharge of oil, gas or other pollutants into the air, soil or
water. In the event of environmental violations, we may be charged with remedial costs and land owners may file claims for alternative
water supplies, property damage or bodily injury. Laws and regulations protecting the environment have become more stringent in
recent years, and may, in some circumstances, result in liability for environmental damage regardless of negligence or fault. In addition,
pollution and similar environmental risks generally are not fully insurable. These liabilities and costs could have a material adverse effect
on our business, financial condition or results of operations. See Item 1, “Business—Government Regulation and Environmental Matters.”
Federal and state legislation and regulatory initiatives relating to hydraulic fracturing could result in increased costs and additional
operating restrictions or delays.
The practice of hydraulic fracturing has come under increased scrutiny by the environmental community. Hydraulic fracturing
involves the injection of water, sand and chemicals under pressure into prospective rock formations to stimulate oil and natural gas
production. We use this completion technique on substantially all of our wells. The EPA has commenced a study of the potential
environmental impact of hydraulic fracturing, with initial results of the study anticipated to be available by late 2012. The EPA also
announced that one of its enforcement initiatives for 2011 to 2013 is to focus on environmental compliance by the energy extraction sector.
Also, the Secretary of Energy Advisory Board has established a Natural Gas Subcommittee to make recommendations on improving safety
and environmental performance of hydraulic fracturing. In addition, some states have adopted, and other states are considering adopting,
regulations that could impose more stringent permitting, disclosure and well construction requirements on hydraulic fracturing operations.
Individually or collectively, such new legislation or regulation could result in increased compliance and operating costs, delays or
additional operating restrictions. If the use of hydraulic fracturing is limited or prohibited, it could delay or effectively prevent the
extraction of oil and gas from formations which would not be economically viable without the use of hydraulic fracturing. This could have
a material adverse effect on our business, financial condition and results of operations.
13
The recent adoption of derivatives legislation by the U.S. Congress could have an adverse effect on our ability to use derivative
instruments to reduce the effect of commodity price, interest rate and other risks associated with our business.
The U.S. Congress adopted comprehensive financial reform legislation that establishes federal oversight and regulation of the over-
the-counter derivatives market and entities, such as us, that participate in that market. The legislation, known as the Dodd-Frank Wall
Street Reform and Consumer Protection Act, or the Act, was signed into law on July 21, 2010 and requires the Commodities Futures
Trading Commission, or the CFTC, and the SEC to promulgate rules and regulations implementing the new legislation. In December 2011,
the CFTC extended temporary exemptive relief from certain swap regulation provisions of the legislation until July 16, 2012. In its
rulemaking under the Act, the CFTC has issued final regulations to set position limits for certain futures and option contracts in the major
energy markets and for swaps that are their economic equivalents. Certain bona fide hedging transactions or positions would be exempt
from these position limits. It is not possible at this time to predict when the CFTC will make these regulations effective. The Act may also
require us to comply with margin requirements and with certain clearing and trade-execution requirements in connection with our
derivative activities, although the application of those provisions to us is uncertain at this time. The Act may also require the counterparties
to our derivative instruments to spin off some of their derivatives activities to a separate entity, which may not be as creditworthy as the
current counterparty. The new legislation and any new regulations could significantly increase the cost of derivative contracts (including
through requirements to post collateral which could adversely affect our available liquidity), materially alter the terms of derivative
contracts, reduce the availability of derivatives to protect against risks that we encounter, reduce our ability to monetize or restructure our
existing derivative contracts and increase our exposure to less creditworthy counterparties. If we reduce our use of derivatives as a result of
the legislation and regulations, our results of operations may become more volatile and our cash flows may be less predictable, which could
adversely affect our ability to plan for and fund capital expenditures. Finally, the legislation was intended, in part, to reduce the volatility of
oil and natural gas prices, which some legislators attributed to speculative trading in derivatives and commodity instruments related to oil
and natural gas. Our revenues could therefore be adversely affected if a consequence of the legislation and regulations is to lower
commodity prices. Any of these consequences could have a material adverse effect on our business, financial condition and results of
operations.
Derivative transactions may limit our potential gains and involve other risks.
In order to manage our exposure to price risks in the sale of our oil and natural gas, we periodically enter into oil and gas price
hedging arrangements with respect to a portion of our expected production. Our hedges are limited in duration, usually for periods of two
years or less. While intended to reduce the effects of volatile oil and natural gas prices, such transactions may limit our potential gains if oil
or natural gas prices were to rise over the price established by the hedging arrangements. In trying to maintain an appropriate balance, we
may end up hedging too much or too little, depending upon how oil or natural gas prices fluctuate in the future.
In addition, derivative transactions may expose us to the risk of financial loss in certain circumstances, including instances in which:
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our production is less than expected;
there is a widening of price basis differentials between delivery points for our production and the delivery point assumed in the
hedge arrangement;
the counterparties to our futures contracts fail to perform under the contracts; or
a sudden, unexpected event materially impacts oil or natural gas prices.
In addition, derivative instruments involve basis risk. Basis risk in a derivative contract occurs when the index upon which the
contract is based is more or less variable than the index upon which the hedged asset is based, thereby making the hedge less effective. For
example, a NYMEX index used for hedging certain volumes of production may have more or less variability than the regional price index
used for the sale of that production.
Certain U.S. federal income tax deductions currently available with respect to oil and gas exploration and development may be
eliminated as a result of proposed legislation.
Legislation has been proposed in the U.S. Congress that would, if enacted into law, make significant changes to U.S. federal income
tax laws, including the elimination of certain key U.S. federal income tax incentives currently available to oil and natural gas exploration
and production companies. These changes include, but are not limited to, the repeal of the percentage depletion allowance for oil and
natural gas properties, the elimination of current deductions for intangible drilling and development costs, the elimination of the deduction
for certain domestic production activities and an extension of the amortization period for certain geological and geophysical expenditures. It
is unclear whether these or similar changes will be enacted and, if enacted, how soon any such changes could become effective. The
passage of this legislation or any other similar changes in U.S. federal income tax laws could eliminate or postpone certain tax deductions
that are currently available with respect to oil and natural gas exploration and development, and any such change could have a material
adverse effect on us.
Item 1B
Unresolved Staff Comments
We have received no written SEC staff comments regarding our periodic or current reports under the Exchange Act which were
issued 180 days or more preceding the end of our 2011 fiscal year that remain unresolved.
14
Item 2
Properties
The following map shows the general locations of our oil and gas production investments and our regional office locations as of
December 31, 2011:
Facilities
We are headquartered in Radnor, Pennsylvania, with regional offices in Pittsburgh, Pennsylvania and Houston, Texas. We also have
district operations facilities at various locations in Texas, Oklahoma, Mississippi, Pennsylvania and West Virginia. All of our office
facilities are leased with the exception of our district operations facilities in Scottsville, Texas and Ravencliff, West Virginia. We believe
that our facilities are adequate for our current needs.
Title to Oil and Gas Properties
Prior to completing an acquisition of producing oil and gas assets, we review title opinions on all material leases. However, as is
customary in the oil and gas industry, we make only a cursory review of title to farmout acreage and to acquire undeveloped oil and gas
leases. Prior to the commencement of drilling operations, a thorough title examination is conducted. To the extent the title examination
reflects defects, we cure such title defects. If we are unable to cure any title defect of a nature such that it would not be prudent to
commence drilling operations on a property, we could suffer a loss of our investment in the property. Our oil and gas properties are subject
to customary royalty interests, liens for debt obligations, current taxes and other burdens that we believe do not materially interfere with the
use or materially affect the value of such properties. We believe that we have satisfactory title to all of our properties and the associated oil
and natural gas in accordance with standards generally accepted in the oil and natural gas industries.
15
Preparation of Reserves Estimates
Our policies and practices regarding the recording of reserves is structured to objectively and accurately estimate our oil and gas
reserves quantities and present values in compliance with the SEC’s regulations and GAAP. Our Manager of Engineering is primarily
responsible for overseeing the preparation of the reserve estimate by our independent third party engineers, Wright & Company, Inc. Our
Manager of Engineering has over 26 years of industry experience in the estimation and evaluation of reserve information, holds a B.S.
degree in Petroleum Engineering from Texas A&M University and is licensed by the state of Texas as a Professional Engineer. The
Company’s internal controls over reserve estimates include reconciliation and review controls, including an independent internal review of
assumptions used in the estimation.
The technical person primarily responsible for review of our reserve estimates at Wright & Company, Inc., meets the requirements
regarding qualifications, independence, objectivity and confidentiality set forth in the Standards Pertaining to the Estimating and Auditing
of Oil and Gas Reserves Information promulgated by the Society of Petroleum Engineers. Wright & Company, Inc. is an independent firm
of petroleum engineers, geologists, geophysicists and petro physicists; they do not own an interest in our properties and are not employed
on a contingent fee basis.
There are numerous uncertainties inherent in estimating quantities of reserves and in projecting future rates of production and timing
of development expenditures, including many factors beyond our control. For additional information about the risks inherent in our
estimates of proved reserves, see Item 1A, “Risk-Factors.”
Summary of Oil and Gas Reserves
Proved Reserves
The following tables present certain information regarding our proved reserves as of December 31, 2011, 2010 and 2009. The proved
reserve estimates presented below were prepared by Wright & Company, Inc., independent petroleum engineers. For additional
information regarding estimates of proved reserves and other information about our oil and gas reserves, see the Supplemental Information
on Oil and Gas Producing Activities (Unaudited) in the Notes to the Consolidated Financial Statements and the report of Wright &
Company, Inc., which is included as an Exhibit to this Annual Report on Form 10-K. We did not file any reports during the year ended
December 31, 2011 with any federal authority or agency with respect to our estimate of oil and gas reserves.
2011
Developed
Undeveloped
2010
Developed
Undeveloped
2009
Developed
Undeveloped
Natural
Gas
(Bcf)
Oil and
Condensate
(MMBbl)
Gas
Equivalents
(Bcfe)
Standardized
Measure
Price Measurement Used 1
$ in millions
$/MMBtu
$/Bbl
Natural
331
339
670
413
332
745
388
389
777
16.5
19.1
35.6
14.8
18.0
32.8
8.4
18.0
26.4
429 $
454
883 $
502 $
440
942 $
439 $
496
935 $
602
52
654 $
574
67
641 $
425
100
525 $
3.95 $
92.22
4.38 $
79.43
3.87 $
61.18
1 Natural gas and oil prices were based on average (beginning of month basis) sales prices per Mcf and Bbl with the representative price of
natural gas adjusted for basis premium and energy content to arrive at the appropriate net price.
16
All of our reserves are located in the continental United Sates. The following table sets forth by region the estimated quantities of
proved reserves and the percentages thereof that are represented by proved developed reserves as of December 31, 2011:
Region
Texas
Appalachia
Mid-Continent
Mississippi
Significant Reserves
Proved
Reserves
(Bcfe)
468
146
99
170
883
% of Total
Proved
Reserves
% Proved
Developed
53%
17%
11%
19%
100%
36%
74%
71%
47%
Our Carthage field in the Cotton Valley and Haynesville Shale plays in East Texas represents approximately 29% of our total proved
reserves as of December 31, 2011. This is the only field that comprises 15% or more of our total proved reserves as of that date. The
following table sets forth certain information with respect to our Carthage field for the periods presented:
Production:
Natural gas (MMcf)
Crude oil and NGLs (MBbl)
Average prices:
Natural gas ($ per Mcfe)
Crude oil and NGLs ($ per Bbl)
Production cost (aggregate $ per Mcfe)
Proved Undeveloped Reserves
2011
Year Ended December 31,
2010
2009
8,417
546
3.69
58.36
1.36
$
$
$
9,725
496
4.13
47.28
1.03
$
$
$
9,081
517
3.71
34.84
1.27
$
$
$
The proved undeveloped reserves included in our reserve estimates relate to wells that are forecasted to be drilled within the next
five years. The following table sets forth the changes in our proved undeveloped reserves during the year ended December 31, 2011:
Proved undeveloped reserves at beginning of year
Revisions of previous estimates
Extensions, discoveries and other additions
Sale of reserves in place
Conversion to proved developed reserves
Proved undeveloped reserves at end of year
Natural Gas
(Bcf)
Oil and
Condensate
(MMBbl)
Natural Gas
Equivalents
(Bcfe)
332
(22)
46
(9)
(8)
339
18.0
(2.6)
4.8
-
(1.1)
19.1
440
(38)
76
(9)
(15)
454
As of December 31, 2011, our proved undeveloped reserves increased to 454 Bcfe from 440 Bcfe as of December 31, 2010. We
experienced performance-related revisions of approximately 38 Bcfe, including downward revisions of 20 Bcfe due primarily to
interference with offsetting and adjacent wells in the Granite Wash and minor performance-related revisions in other areas, as well as 18
Bcfe due to a combination of factors that included non-participation, lease expirations, the effect of lower natural gas prices and locations
that are not expected to be developed during a five-year period. During 2011, we had proved undeveloped reserve additions of 76 Bcfe,
including approximately 45 Bcfe of natural gas primarily in the Marcellus Shale in Pennsylvania and Selma Chalk in Mississippi and
approximately 31 Bcfe of natural gas, crude oil and NGLs in the Eagle Ford Shale in Texas. We had a decrease of 9 Bcfe due to the sale of
substantially all of our properties, including proved undeveloped locations, in the Arkoma Basin. Finally, we converted approximately 15
Bcfe, primarily in the Granite Wash, to proved developed reserves.
During 2011, we incurred capital expenditures of approximately $40 million in connection with the conversion of proved
undeveloped reserves to proved developed reserves.
17
Oil and Gas Production Volumes, Prices and Costs
Oil and Gas Production by Region
The following tables set forth by region the average daily production and total production for the periods presented:
Region
Texas
Appalachia
Mid-Continent 1
Mississippi
Gulf Coast 2
2009
Average Daily Production
for the Year Ended December 31,
2010
2011
(MMcfe)
37.1
28.5
42.0
20.9
0.8
129.3
48.9
24.8
35.8
18.0
-
127.5
35.9
31.4
35.1
21.5
15.8
139.7
2009
Total Production
for the Year Ended December 31,
2010
2011
(MMcfe)
13,526
10,397
15,340
7,643
295
47,201
17,854
9,063
13,082
6,554
-
46,553
13,116
11,465
12,826
7,822
5,771
51,000
1 We sold a substantial portion of our Arkoma Basin properties in August 2011, which represented estimated annual production of
approximately 4 Bcfe.
2 We completed the sale of our Gulf Coast properties in January 2010.
Production Prices and Costs
The following table sets forth the average sales prices per unit of volume and our production costs, not including ad valorem and
severance taxes, per unit of production for the periods presented:
Average prices:
Natural gas ($ per Mcf)
Crude oil ($ per Bbl)
NGLs ($ per Bbl)
Production cost (aggregate $ per Mcfe)
Year Ended December 31,
2010
2009
2011
$
$
$
$
4.10 $
93.19 $
47.83 $
4.40 $
75.56 $
39.69 $
1.12 $
1.06 $
3.91
57.68
29.86
1.09
18
Drilling Activities
Wells Drilled
The following table sets forth the gross and net exploratory and development wells that we drilled during the years ended December
31, 2011, 2010 and 2009 as well as wells that were in progress at the end of each year. The number of wells drilled refers to the number of
wells completed at any time during the year, regardless of when drilling was initiated.
2011
2010
2009
Gross
Net
Gross
Net
Gross
Net
Development
Productive
Non-productive
Under evaluation
Total development
Exploratory
Productive
Non-productive
Under evaluation
Total exploratory
Total
45
-
2
47
5
4
-
9
56
32.1
-
1.3
33.4
3.8
2.7
-
6.5
39.9
59
-
-
59
5
3
1
9
68
40.0
-
-
40.0
2.7
1.2
0.5
4.4
44.4
Wells in progress at end of year
7
5.8
6
3.5
The following table sets forth the regions in which we drilled our wells for the periods presented:
25
1
4
30
2
-
-
2
32
2
Region
Texas
Appalachia
Mid-Continent
Mississippi
Total
Present Activities
2011
2010
2009
Gross
Net
Gross
Net
Gross
Net
32
5
19
-
56
26.7
4.3
8.9
-
39.9
12
1
41
14
68
11.1
0.8
18.7
13.8
44.4
10
2
17
3
32
16.9
1.0
1.8
19.7
1.0
-
-
1.0
20.7
1.5
9.5
2.0
6.2
3.0
20.7
As of December 31, 2011, we had seven gross (5.8 net) wells in progress, all of which were located in the Eagle Ford Shale play in
South Texas. As of February 21, 2011, six of these wells were successfully completed and placed on production and the remaining well is
waiting on completion. Our two (1.3) net wells under evaluation are located in the Marcellus Shale in Pennsylvania.
Delivery Commitments
We generally sell our natural gas, oil and NGL products using short-term floating price physical and spot market contracts. Although
it is not our general practice, from time to time we enter into certain transactions in which we provide production commitments extending
beyond one month. As of December 31, 2011, we did not have any material commitments to provide a fixed and determinable quantity of
our natural gas, crude oil or NGL production beyond the current month.
Productive Wells
The following table sets forth the number of productive wells in which we had a working interest as of December 31, 2011:
Region
Texas
Appalachia
Mid-Continent
Mississippi
Primarily Natural Gas
Gross
Net
Primarily Oil
Total
Gross
Net
Gross
Net
359
671
94
569
1,693
255.6
566.0
40.7
549.2
1,411.5
29
-
10
-
39
24.3
-
6.8
-
31.1
388
671
104
569
1,732
279.9
566.0
47.5
549.2
1,442.6
Of the total wells presented in the table above, we are the operator of 1,503 gross (1,465 gas and 38 oil) and 1,358.7 net (1,328.1 gas
and 30.6 oil) wells. In addition to the above working interest wells, we own royalty interests in 2,884 gross wells.
Acreage
The following table sets forth our developed and undeveloped acreage as of December 31, 2011 (in thousands):
Developed
Undeveloped
Total
Gross
Net
Gross
Net
Gross
Net
875
813
465
274
1,340
1,087
Our acreage is located in Texas, Appalachia, the Mid-Continent and Mississippi regions of the United States. The primary terms of
our leases generally range from three to five years and we do not have any concessions. As of December 31, 2011, our net undeveloped
acreage is scheduled to expire as shown in the table below, unless the primary lease terms are extended, held by production or otherwise
changed:
Percent of gross undeveloped acreage
Percent of net undeveloped acreage
2012
2013
2014
16%
13%
38%
18%
9%
10%
Thereafter
37%
59%
We do not believe that the scheduled expiration of our undeveloped acreage will substantially affect our ability or plans to conduct
our exploration and development activities. The amount of acreage expiring in 2013 includes a large non-operated lease position in
Appalachia in which we hold a 25% interest; we have no remaining capitalized costs related to this lease.
19
Item 3
Legal Proceedings
Although we may, from time to time, be involved in litigation and claims arising out of our operations in the normal course of
business, we are not currently a party to any material legal proceedings. In addition, we are not aware of any material legal or governmental
proceedings against us, or contemplated to be brought against us, under the various environmental protection statutes to which we are
subject. See Item 1, “Business—Government Regulation and Environmental Matters,” for a more detailed discussion of our material
environmental obligations.
Item 4
Reserved
Part II
Item 5
Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is traded on the NYSE under the symbol “PVA.” The high and low sales prices (composite transactions) and
dividends declared related to each fiscal quarter in 2011 and 2010 were as follows:
Quarter Ended
December 31, 2011
September 30, 2011
June 30, 2011
March 31, 2011
December 31, 2010
September 30, 2010
June 30, 2010
March 31, 2010
Equity Holders
Sales Price
High
Low
$
$
$
$
$
$
$
$
6.97 $
14.12 $
17.20 $
18.31 $
18.80 $
20.50 $
29.25 $
27.80 $
Cash
Dividends
Declared
0.05625
0.05625
0.05625
0.05625
0.05625
0.05625
0.05625
0.05625
4.21 $
5.47 $
12.88 $
14.40 $
13.99 $
13.38 $
19.63 $
21.64 $
As of February 10, 2012, there were 453 record holders and approximately 6,330 beneficial owners (held in street name) of our
common stock.
20
Performance Graph
The following graph compares our five-year cumulative total shareholder return (assuming reinvestment of dividends) with the
cumulative total return of the Standard & Poor’s 600 Oil & Gas Exploration & Production Index and the Standard & Poor’s Small Cap 600
Index. As of December 31, 2011, there were nine companies in the Standard & Poor’s 600 Oil & Gas Exploration & Production Index:
Approach Resources Inc., Contango Oil & Gas Company, GeoResources Inc., Gulfport Energy Corporation, Penn Virginia Corporation,
Petroleum Development Corporation, Petroquest Energy Inc., Stone Energy Corporation and Swift Energy Company. The graph assumes
$100 is invested on January 1, 2007 in us and each index at December 31, 2006 closing prices.
Penn Virginia Corporation
S&P Small Cap 600 Index
S&P 600 Oil & Gas Exploration & Production Index
$
$
$
125.30 $
99.70 $
126.64 $
74.98 $
68.72 $
58.42 $
62.25 $
86.29 $
74.42 $
49.79 $
109.00 $
108.20 $
16.05
110.10
101.88
2007
2008
December 31,
2009
2010
2011
21
Item 6
Selected Financial Data
The following selected historical financial information was derived from our Consolidated Financial Statements as of and for the
years ended December 31, 2011, 2010, 2009, 2008 and 2007. The selected financial data should be read in conjunction with our
Consolidated Financial Statements and the accompanying Notes and Supplemental Data in Item 7, “Management’s Discussion and
Analysis of Financial Condition and Results of Operations,” and Item 8, “Financial Statements and Supplemental Data.”
Statements of Income Data 1:
$
Revenues
$
Depreciation, depletion and amortization
Operating income (loss) 2
$
$
Income (loss) from continuing operations
Net income (loss) 3
$
Income (loss) attributable to Penn Virginia Corporation $
2011
2008
2009
2010
(in thousands, except per share amounts)
2007
306,005 $
162,534 $
(155,419) $
(132,915) $
(132,915) $
(132,915) $
254,438 $
134,700 $
(98,808) $
(65,327) $
19,667 $
(8,423) $
235,206 $
154,351 $
(205,346) $
(130,856) $
(77,368) $
(114,643) $
469,490 $
135,687 $
142,034 $
93,619 $
181,520 $
121,084 $
303,505
88,237
77,155
35,196
80,810
50,491
Common Stock Data 1:
Earnings (loss) per common share, basic
Continuing operations
Discontinued operations
Gain on sale of discontinued operations
Net income (loss)
Earnings (loss) per common share, diluted
Continuing operations
Discontinued operations
Gain on sale of discontinued operations
Net income (loss)
Weighted-average shares outstanding:
Basic
Diluted
Actual shares outstanding at year-end
Dividends declared per share
Market value at year-end
Number of shareholders
Balance Sheet and Other Financial Data 1:
Property and equipment, net
Total assets
Total debt
Shareholders' equity
Cash provided by operating activities
Cash paid for capital expenditures
Other Statistical Data:
Total production (MMcfe)
Proved reserves (Bcfe)
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
(2.90) $
- $
- $
(2.90) $
(2.90) $
- $
- $
(2.90) $
45,784
45,784
45,714
0.225 $
5.29 $
6,787
(1.44) $
0.12 $
1.13 $
(0.19) $
(1.44) $
0.12 $
1.13 $
(0.19) $
45,553
45,553
45,557
0.225 $
16.82 $
6,708
(2.99) $
0.37 $
- $
(2.62) $
(2.99) $
0.37 $
- $
(2.62) $
43,811
43,811
45,272
0.225 $
21.29 $
3,486
2.23 $
0.66 $
- $
2.89 $
2.22 $
0.65 $
- $
2.87 $
41,760
42,031
41,786
0.225 $
25.66 $
8,761
0.92
0.40
-
1.32
0.91
0.40
-
1.31
38,061
38,358
41,331
0.225
42.89
8,196
1,777,575 $
1,943,053 $
697,307 $
846,309 $
144,741 $
445,623 $
1,705,584 $
1,944,600 $
506,536 $
980,276 $
79,839 $
405,994 $
1,479,452 $
2,888,507 $
498,427 $
1,237,999 $
117,733 $
205,676 $
1,646,215 $
2,996,565 $
539,438 $
1,222,442 $
246,587 $
547,058 $
1,198,506
2,253,461
315,655
911,700
186,550
488,470
46,553
883
47,201
942
51,000
935
46,881
916
40,569
680
1 PVG's results of operations, financial position and cash flows have been reported as discontinued operations for all periods presented.
Accordingly, all items presented above not classified as discontinued operations exclude amounts attributable to PVG unless indicated
otherwise.
2 Operating income (loss) for 2011, 2010, 2009, 2008 and 2007 included impairment charges of $104.7 million, $46.0 million, $106.4
million, $20.0 million and $2.6 million related to our oil and gas properties and other assets.
3 Net income (loss) for 2010 includes a gain of $51.5 million, net of tax, on the sale of discontinued operations representing the final
disposition of our interests in PVG.
22
Item 7 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,” “we,” “us” or “our”) should be read in conjunction with our Consolidated Financial Statements and Notes
thereto included in Item 8, “Financial Statements and Supplemental Data.” All dollar amounts presented in the tables that follow are in
thousands unless otherwise indicated.
Overview of Business
We are an independent oil and gas company engaged in the exploration, development and production of natural gas and oil in various
domestic onshore regions. We have a geographically diverse asset base with areas of operations in Texas, Appalachia, the Mid-Continent
and Mississippi regions of the United States. As of December 31, 2011, we had proved natural gas and oil reserves of approximately 883
Bcfe. Our operations include primarily the drilling of unconventional development wells and exploring for new exploitable resources.
We are currently primarily focused on the Eagle Ford Shale in South Texas. During 2011, we brought on line approximately 30 gross
wells in this play. In 2011, we also pursued selected drilling opportunities in the horizontal Granite Wash play in our Mid-Continent region
through participation in wells drilled by our joint venture partner.
The following table sets forth certain summary operating and financial statistics for the periods presented:
Total production (MMcfe)
Daily production (MMcfe per day)
Product revenues, as reported
Product revenues, as adjusted for derivatives
Operating loss
Interest expense
Cash provided by operating activities
Cash paid for capital expenditures
Cash and cash equivalents at end of period
Debt outstanding, net of discounts, at end of period
Credit available under revolving credit facility at end of period 1
Net development wells drilled
Net exploratory wells drilled
1 As reduced by outstanding borrowings and letters of credit.
23
Year Ended December 31,
2010
2011
2009
46,553
127.5
47,201
129.3
51,000
139.7
300,046 $
323,608 $
251,336 $
284,816 $
228,659
288,565
(155,419) $
56,216 $
(98,808) $
53,679 $
(205,346)
44,231
144,741 $
445,623 $
79,839 $
405,994 $
117,733
205,676
7,512 $
697,307 $
199,600 $
120,911 $
506,536 $
299,268 $
79,017
498,427
299,268
$
$
$
$
$
$
$
$
$
33.4
6.5
40.0
4.4
19.7
1.0
Key Developments
During 2011, the following general business developments and corporate actions had an impact on our results of operations and
financial position: (i) drilling results in the Eagle Ford Shale, Granite Wash and Marcellus Shale plays, (ii) acquiring properties in the Eagle
Ford Shale play, (iii) selling our Arkoma Basin assets and related restructuring activities, (iv) entering into a new five-year revolving credit
facility, or the Revolver, and (v) offering and selling $300 million of our 7.25% Senior Notes due 2019, or 2019 Senior Notes, together with
the tender offer to repurchase our 4.50% Convertible Senior Subordinated Notes due 2012, or the Convertible Notes.
Drilling Results and Future Development Plans
During 2011, we drilled a total of 39.9 net wells, including 26.7 net wells in the Eagle Ford Shale, 8.9 net wells in the Mid-Continent
region, primarily in the Granite Wash, and 4.3 net wells in the Marcellus Shale.
We currently have three rigs drilling in the Eagle Ford Shale. We have drilled a total of 39 wells since we began operations in this
play during the second half of 2010. Of the total wells drilled, 35 (29.2 net) wells are producing, one is waiting on completion and three are
in progress as of February 22, 2012. The producing wells have had an average peak gross production rate of approximately 1,000 BOEPD
per well. Eagle Ford Shale production was approximately 9,800 (6,280 net) BOEPD at the end of January 2012, with oil comprising
approximately 89 percent, NGLs comprising approximately six percent and natural gas comprising approximately five percent. We expect
to continue drilling in this play for the remainder of 2012 and beyond. We have allocated approximately 85% of our capital expenditures
during 2012 for activities in the Eagle Ford Shale.
In the Mid-Continent region, we successfully drilled and completed 6.2 net development wells in the Granite Wash during 2011. We
plan to continue our Granite Wash development program, primarily as a non-operator. Our exploratory program in the Mid-Continent
region, excluding the Granite Wash, resulted in four dry holes (2.7 net) at an aggregate cost of $18.9 million during 2011.
In 2011, we drilled five gross (4.3 net) and completed three horizontal test wells in the Marcellus Shale located in the central portion
of our approximately 35,000 net acreage position in Potter and Tioga counties, Pennsylvania. The completed wells are connected to a
pipeline and have been producing since October 2011 at an average rate of 2.5 MMcf per day. Completion of the remaining two wells and
all other significant exploration and development activities have been deferred due primarily to the recent decline in natural gas prices. We
will monitor long-term production of the existing wells and natural gas prices to determine the potential resumption of a development
program in this area.
Eagle Ford Property Acquisitions
During 2011, we acquired approximately 7,300 net Eagle Ford Shale acres in Gonzales County, Texas for approximately $27 million,
or approximately $3,700 per acre. The acreage acquired in these transactions is in close proximity to our initial 2010 Eagle Ford Shale
acquisition, which was approximately 6,800 net acres for $31.1 million. We are the operator of the combined Gonzales County acreage
with an average working interest of approximately 81%.
In December 2011, we entered into an agreement with a major oil and gas company to jointly explore approximately 13,000 gross
acres of the Eagle Ford Shale in Lavaca County, Texas. The agreement establishes an area of mutual interest near our existing acreage in
Gonzales County. Depending on the future participation of other companies, our minimum working interest will be approximately 50%.
Under the terms of the agreement, we must drill six wells by September 1, 2012 to earn our entire interest in the acreage. We will carry our
counterparty on its working interest in the first three wells.
Disposition of Arkoma Basin Properties and Related Restructuring Action
In August 2011, we sold a substantial portion of our Arkoma Basin assets for approximately $30 million, excluding transaction costs
and subject to customary purchase and sale adjustments. Upon the final settlement, we recognized an insignificant loss in connection with
the transaction, following an impairment of approximately $71 million in the second quarter of 2011. The sale, which was effective July 1,
2011, included primarily natural gas and coal bed methane properties comprising approximately 73,000 net acres in Oklahoma and Texas
with proved reserves of approximately 37.1 Bcfe as well as related inventory and equipment. For 2011, these properties represented
production of approximately 2 Bcfe.
During 2011, we completed an organizational restructuring due primarily to our decision to exit the Arkoma Basin and to consolidate
certain operations functions to our Houston, Texas location. This restructuring and consolidation resulted in the termination of
approximately 40 employees, most of whom were based out of our Tulsa, Oklahoma office, as well as certain corporate positions in
connection with a reallocation of administrative responsibilities. We recorded a charge of $2.3 million, including termination benefits,
employee and office relocation costs, and a lease charge in connection with this action.
24
Completion of a New Credit Facility
In August 2011, we entered into the Revolver which provides for a $300 million revolving commitment, including a $20 million
sublimit for the issuance of letters of credit. At December 31, 2011, the Revolver had a borrowing base of $380 million which takes into
account the Arkoma Basin sale discussed above, and an accordion feature that allows us to increase the commitment up to the lower of the
borrowing base or $600 million upon receiving additional commitments from one or more lenders. The permitted leverage ratio (net debt
divided by EBITDAX, as defined in the Revolver) is 4.5 through periods ending on or before June 30, 2013, after which it will be 4.0.
The Revolver is guaranteed by Penn Virginia and all of our material subsidiaries, or the Guarantor Subsidiaries. The obligations
under the Revolver are secured by a first priority lien on substantially all of our proved oil and gas reserves and a pledge of our equity
interests in the Guarantor Subsidiaries. The Revolver will mature in August 2016.
In January 2012, we amended the Revolver to enhance our ability to hedge production. Previously, our hedging was limited to the
lesser of certain fixed percentages of our reasonably anticipated production from proved developed reserves and total proved reserves. The
amendment expands the potential volume subject to hedging to certain percentages of reasonably anticipated production from proved
undeveloped reserves as well as proved developed reserves. The permitted percentages vary depending on the future period to which the
hedging transaction relates.
Senior Note Offering and Tender Offer to Repurchase Convertible Notes
In April 2011, we completed the offering of the 2019 Senior Notes. Total proceeds received from the offering were $293.5 million,
net of underwriting and debt issuance costs. We used $237.1 million of the proceeds to repurchase approximately 98% of the Convertible
Notes plus accrued interest, and we have a total of $4.9 million (principal amount) of Convertible Notes currently outstanding. We used the
remainder of the proceeds to provide working capital for general corporate purposes, including capital expenditures.
25
Results of Operations
Year Ended December 31, 2011 Compared to the Year Ended December 31, 2010
The following table sets forth a summary of certain operating and financial performance for the periods presented:
Year Ended December 31,
2011
2010
Favorable
(Unfavorable) % Change
$
$
$
33,410
1,283
907
46,553
38,919
709
672
47,201
4.10 $
93.19
47.83
6.45 $
4.40 $
75.56
39.69
5.32 $
137,070 $
119,582
43,394
300,046
3,570
2,389
306,005
36,988
15,157
13,690
48,328
78,943
162,534
104,688
1,096
461,424
171,141 $
53,532
26,663
251,336
648
2,454
254,438
35,757
14,180
13,917
58,383
49,641
134,700
45,959
709
353,246
(5,509)
574
235
(648)
(0.30)
17.63
8.14
1.13
(34,071)
66,050
16,731
48,710
2,922
(65)
51,567
(1,231)
(977)
227
10,055
(29,302)
(27,834)
(58,729)
(387)
(108,178)
(14)%
81%
35%
(1)%
(7)%
23%
21%
21%
(20)%
123%
63%
19%
451%
(3)%
20%
(3)%
(7)%
2%
17%
(59)%
(21)%
(128)%
(55)%
(31)%
(155,419)
(98,808)
(56,611)
(57)%
(56,216)
(25,421)
15,651
335
(221,070)
88,155
(132,915)
-
-
(132,915)
-
(132,915) $
(53,679)
-
41,906
2,403
(108,178)
42,851
(65,327)
33,448
51,546
19,667
(28,090)
(8,423) $
(2,537)
(25,421)
(26,255)
(2,068)
(112,892)
45,304
(67,588)
(33,448)
(51,546)
(152,582)
28,090
(124,492)
(5)%
NM
(63)%
(86)%
(104)%
106%
(103)%
NM
NM
NM
NM
NM
Total Production:
Natural gas (MMcf)
Crude oil (MBbl)
NGL (MBbl)
Total production (MMcfe)
Realized prices, before derivatives:
Natural gas ($/Mcf)
Crude oil ($/Bbl)
NGL ($/Bbl)
Total ($/Mcfe)
Revenues
Natural gas
Crude oil
NGL
Total product revenues
Gain on sales of property and equipment
Other income
Total revenues
Operating Expenses
Lease operating
Gathering, processing and transportation
Production and ad valorem taxes
General and administrative
Exploration
Depreciation, depletion and amortization
Impairments
Other
Total operating expenses
Operating loss
Other income (expense)
Interest expense
Loss on extinguishment of debt
Derivatives
Other
Loss from continuing operations before income taxes
Income tax benefit
Loss from continuing operations
Income from discontinued operations, net of tax
Gain on sale of discontinued operations
Net income (loss)
Less net income attributable to noncontrolling interests
Loss attributable to Penn Virginia Corporation
$
NM - Not meaningful
26
Production
The following tables set forth a summary of our total and daily production volumes by product and geographical region for the
periods presented:
Natural Gas
Texas
Appalachia
Mid-Continent
Mississippi
Gulf Coast
(Divested)
Total production
Year Ended December 31, Favorable Year Ended December 31,
(Unfavorable)
2011
2011
2010
2010
Favorable
(Unfavorable) % Change
(MMcfe)
9,670
9,055
8,244
6,441
-
33,410
10,510
10,358
10,338
7,505
208
38,919
(840)
(1,303)
(2,094)
(1,064)
(208)
(5,509)
(MMcfe per day)
26.5
24.8
22.6
17.6
-
91.5
28.8
28.4
28.3
20.6
0.6
106.7
(2.3)
(3.6)
(5.7)
(3.0)
(0.6)
(15.2)
(8)%
(13)%
(20)%
(14)%
(100)%
(14)%
Crude Oil
Year Ended December 31,
2011
2010
Favorable Year Ended December 31,
(Unfavorable)
2011
2010
Favorable
(Unfavorable) % Change
Texas
Appalachia
Mid-Continent
Mississippi
Gulf Coast
(Divested)
Total production
(MBbl)
868.7
0.5
395.1
18.9
-
1,283.2
113.5
5.1
559.3
22.9
7.7
708.5
755.2
(4.6)
(164.2)
(4.0)
(7.7)
574.7
(MBbl per day)
2.38
0.00
1.08
0.05
-
3.51
0.31
0.01
1.53
0.06
0.02
1.93
2.07
(0.01)
(0.45)
(0.01)
(0.02)
1.58
665%
(90)%
(29)%
(17)%
(100)%
81%
NGLs
Texas
Appalachia
Mid-Continent
Gulf Coast
(Divested)
Total production
Year Ended December 31, Favorable Year Ended December 31,
(Unfavorable)
2010
2011
2011
2010
Favorable
(Unfavorable) % Change
(MBbl)
495.2
0.9
411.1
-
907.2
389.1
1.4
274.4
6.9
671.8
106.1
(0.5)
136.7
(6.9)
235.4
(MBbl per day)
1.36
0.00
1.13
-
2.49
1.07
0.00
0.75
0.02
1.84
0.29
(0.00)
0.38
(0.02)
0.65
27%
(36)%
50%
(100)%
35%
Combined Total
Year Ended December 31, Favorable Year Ended December 31, Favorable
2011
2010
(Unfavorable)
2011
2010
(Unfavorable) % Change
Texas
Appalachia
Mid-Continent
Mississippi
Gulf Coast (Divested)
Total production
(MMcfe)
17,854
9,063
13,082
6,554
-
46,553
13,526
10,397
15,340
7,643
295
47,201
(MMcfe per day)
4,328
(1,334)
(2,258)
(1,089)
(295)
(648)
48.9
24.8
35.8
18.0
-
127.5
37.1
28.5
42.0
20.9
0.8
129.3
11.8
(3.7)
(6.2)
(2.9)
(0.8)
(1.8)
32%
(13)%
(15)%
(14)%
(100)%
(1)%
The decline in total production during 2011 was due primarily to the lack of any significant natural gas drilling since mid-2010 and
the subsequent natural production declines as well as the effect of the sale of our Arkoma Basin properties. The effect of the sale of the
Arkoma Basin properties was approximately 2 Bcfe. The natural gas production decline was substantially offset by an increase in oil and
NGL production attributable to our drilling activity in the Eagle Ford Shale. Approximately 28% of total production on an equivalent basis
in 2011 was attributable to oil and NGLs, an increase over the previous year of approximately 59%. The shift in production mix reflects our
focus on emerging oil and liquids-rich plays in the Eagle Ford Shale in Texas and the Mid-Continent region. During 2011, our Eagle Ford
Shale production represented approximately 11% of our total production. We had no production from this play in 2010.
27
Product Revenues and Prices
The following tables set forth a summary of our revenues and prices per unit of volume by product and geographical region for the
periods presented:
Natural Gas
Texas
Appalachia
Mid-Continent
Mississippi
Gulf Coast (Divested)
Total revenues
Crude Oil
Texas
Appalachia
Mid-Continent
Mississippi
Gulf Coast (Divested)
Total revenues
NGLs
Texas
Appalachia
Mid-Continent
Gulf Coast (Divested)
Total revenues
Combined Total
Texas
Appalachia
Mid-Continent
Mississippi
Gulf Coast (Divested)
Total revenues
Year Ended December 31,
2011
2010
Favorable Year Ended December 31,
(Unfavorable)
2011
2010
Favorable
(Unfavorable)
$
$
38,072 $
36,636
35,315
27,047
-
137,070 $
43,247 $
45,581
47,694
33,351
1,268
171,141 $
(5,175) $
(8,945)
(12,379)
(6,304)
(1,268)
(34,071) $
($ per Mcfe)
3.94 $
4.05
4.28
4.20
-
4.10 $
4.11 $
4.40
4.61
4.44
6.10
4.40 $
(0.17)
(0.35)
(0.33)
(0.24)
(6.10)
(0.30)
Year Ended December 31,
2011
2010
Favorable Year Ended December 31,
(Unfavorable)
2011
2010
Favorable
(Unfavorable)
$
$
81,473 $
40
36,145
1,924
-
119,582 $
8,844 $
164
42,176
1,750
598
53,532 $
72,629 $
(124)
(6,031)
174
(598)
66,050 $
($ per Bbl)
93.79 $
80.00
91.48
101.80
-
93.19 $
77.92 $
32.16
75.41
76.42
77.66
75.56 $
15.87
47.84
16.07
25.38
(77.66)
17.63
Year Ended December 31,
2011
2010
Favorable Year Ended December 31,
(Unfavorable)
2011
2010
Favorable
(Unfavorable)
$
$
24,753 $
46
18,595
-
43,394 $
15,150 $
51
11,152
310
26,663 $
9,603 $
(5)
7,443
(310)
16,731 $
($ per Bbl)
49.99 $
51.11
45.23
-
47.83 $
38.94 $
36.43
40.64
44.93
39.69 $
11.05
14.68
4.59
(44.93)
8.14
Year Ended December 31,
2011
2010
Favorable Year Ended December 31,
(Unfavorable)
2011
2010
Favorable
(Unfavorable)
$
$
144,298 $
36,722
90,055
28,971
-
300,046 $
67,241 $
45,796
101,022
35,101
2,176
251,336 $
77,057 $
(9,074)
(10,967)
(6,130)
(2,176)
48,710 $
($ per Mcfe)
8.08 $
4.05
6.88
4.42
-
6.45 $
4.97 $
4.40
6.59
4.59
7.38
5.32 $
3.11
(0.35)
0.29
(0.17)
(7.38)
1.13
28
As illustrated below, oil and NGL production volume coupled with improved oil and NGL pricing were the significant factors for
increasing revenues. The increase was partially offset by lower natural gas production volumes and prices. The following table provides an
analysis of the change in our revenues for the year ended December 31, 2011 as compared to the year ended December 31, 2010:
Natural gas
Crude oil
NGL
Effects of Derivatives
Revenue Variance Due to
Price
Volume
$
(24,223) $
43,420
9,343
28,540 $
$
(9,848) $
22,630
7,388
20,170 $
Total
(34,071)
66,050
16,731
48,710
Our natural gas and crude oil revenues may change significantly from period to period as a result of changes in commodity prices. As
part of our risk management strategy, we use derivative financial instruments to hedge natural gas and crude oil prices. In 2011 and 2010,
we received $23.6 million and $33.5 million in cash settlements of oil and gas derivatives.
The following table reconciles natural gas and crude oil revenues to realized prices, as adjusted for derivative activities, for the
periods presented:
Natural gas revenues as reported
Cash settlements on natural gas derivatives, net
Natural gas revenues adjusted for derivatives
Natural gas prices per Mcf, as reported
Cash settlements on natural gas derivatives per Mcf
Natural gas prices per Mcf adjusted for derivatives
Crude oil revenues as reported
Cash settlements on crude oil derivatives, net
Crude oil revenues adjusted for derivatives
Crude oil prices per Bbl, as reported
Cash settlements on crude oil derivatives per Bbl
Crude oil prices per Bbl adjusted for derivatives
Gain on Sales of Property and Equipment
Year Ended December 31, Favorable
2010
171,141 $
33,914
205,055 $
2011
137,070 $
22,158
159,228 $
(34,071)
(11,756)
(45,827)
$
$
(Unfavorable) % Change
$
$
$
$
$
$
4.10 $
0.66
4.77 $
4.40 $
0.87
5.27 $
119,582 $
1,404
120,986 $
53,532 $
(434)
53,098 $
93.19 $
1.09
94.29 $
75.56 $
(0.61)
74.94 $
(0.29)
(0.21)
(0.50)
66,050
1,838
67,888
17.64
1.71
19.34
(20)%
(35)%
(22)%
(7)%
(24)%
(10)%
123%
424%
128%
23%
279%
26%
In December 2011, we sold approximately 2,700 net undeveloped acres in Butler and Armstrong counties in Pennsylvania for
proceeds of $8.1 million, net of transaction costs. We recognized a gain of $3.3 million in connection with this transaction. In addition, we
recognized several individually insignificant gains on the sale of property, equipment, tubular inventory and well material during both 2011
and 2010.
Other Income
Other income, which includes ancillary gathering, transportation, compression and water disposal fees, decreased marginally during
2011 as compared to 2010.
29
Operating Expenses
The following table summarizes certain of our operating expenses per Mcfe for the periods presented:
Lease operating
Gathering, processing and transportation
Production and ad valorem taxes
General and administrative excluding share-based
compensation and restructuring charges
General and administrative
Depreciation, depletion and amortization
Lease Operating
$
0.79 $
0.33
0.29
0.83
1.04
3.49
Year Ended December 31,
2011
2010
Favorable
(Unfavorable) % Change
(0.03)
(0.03)
0.00
(4)%
(8)%
0%
0.76 $
0.30
0.29
0.90
1.24
2.85
0.07
0.20
(0.64)
8%
16%
(22)%
Lease operating expense increased during 2011 due to higher employee-related and environmental compliance costs as well as higher
work-over costs, particularly in the East Texas region. In addition, certain other costs, including water disposal, chemical treatment and
general repairs and maintenance were generally higher commensurate with higher oil and NGL volume during 2011. These cost increases
were partially offset by lower compression costs attributable to lower natural gas production in 2011 and our ongoing efforts to rationalize
certain compression assets in our more mature producing regions in Appalachia and Mississippi.
Gathering, Processing and Transportation
Gathering, processing and transportation charges increased during 2011 due primarily to both higher processing costs and related
volumes associated with NGL production. Due to lower overall natural gas volumes, particularly in the Appalachian region, we were
unable to recover the cost of all of our unused firm transportation capacity.
Production and Ad Valorem Taxes
Production and ad valorem taxes decreased on an absolute basis due to marginally lower production in 2011 as well as a decrease in
the severance tax rate imposed by the State of Oklahoma on certain wells during the second half of 2011. We also recorded a property tax
recovery from prior periods of $1.2 million in 2011 attributable to wells located in West Virginia. In 2010, we recorded ad valorem tax
settlements of $1.4 million with certain jurisdictions that were also attributable to prior periods. As a percentage of revenue, excluding the
recovery and settlements, production and ad valorem taxes decreased to 5.0% in 2011 from 6.1% during 2010.
General and Administrative
The following table sets forth the components of general and administrative expenses for the periods presented:
Recurring general and administrative expenses
Share-based compensation
Restructuring expenses
$
$
38,547 $
7,430
2,351
48,328 $
Year Ended December 31, Favorable
2010
2011
(Unfavorable) % Change
3,825
381
5,849
10,055
9%
5%
71%
17%
42,372 $
7,811
8,200
58,383 $
Recurring general and administrative expenses decreased due to lower employee headcount and lower support costs from restructuring
actions taken during 2011 and 2010. Share-based compensation charges decreased during 2011 due primarily to a smaller number of awards
that vested upon grant due to retirement eligibility. Restructuring expenses during 2011 included termination benefits, office and employee
relocation and lease costs attributable to the restructuring following the sale of our Arkoma Basin properties. Restructuring expenses during
2010 included termination benefits and office and employee relocation costs as well as a $3.5 million charge related to the assignment of
the lease of our former Kingsport, Tennessee office.
30
Exploration
The following table sets forth the components of exploration expenses for the periods presented:
Dry hole costs
Geological and geophysical costs
Unproved leasehold amortization
Drilling rig charges
Other, primarily delay rentals
$
$
18,864 $
11,202
42,076
4,620
2,181
78,943 $
(Unfavorable) % Change
(7,582)
(1,034)
(17,083)
(4,620)
1,017
(29,302)
11,282 $
10,168
24,993
-
3,198
49,641 $
(67)%
(10)%
(68)%
NM
32%
(59)%
Year Ended December 31, Favorable
2010
2011
The increase in dry hole costs was attributable primarily to four gross (2.7 net) unsuccessful wells in the Mid-Continent region during
2011 as compared to three gross (1.2 net) during 2010 in the same region. Geological and geophysical costs reflected a larger exploration
program in 2011. The increase in amortization of unproved leaseholds was due primarily to significant acquisitions during 2010. In
addition, we incurred rig-related charges during the 2011 period in connection with the current suspension of our drilling program in the
Marcellus Shale.
Depreciation, Depletion and Amortization (DD&A)
The following tables set forth the components of DD&A and the nature of the variances for the periods presented:
Depletion
Depreciation - Oil and gas operations
Depreciation - Corporate
Amortization
Year ended December 31, 2011 compared to 2010
(Unfavorable) % Change
$
Year Ended December 31, Favorable
2010
127,836 $
2,536
3,884
444
134,700 $
2011
157,365 $
2,429
2,241
499
162,534 $
(29,529)
107
1,643
(55)
(27,834)
$
(23)%
4%
42%
(12)%
(21)%
Production
$
1,849 $
DD&A Variance Due to
Rates
Total
(29,683) $
(27,834)
The effect of lower overall production volume on DD&A was more than offset by higher depletion rates associated with oil and NGL
production. Our average depletion rate increased to $3.38 per Mcfe for 2011 from $2.71 per Mcfe for 2010 due primarily to higher
capitalized finding and development costs attributable to our oil wells in the Eagle Ford Shale.
Impairments
The following table summarizes the impairments recorded for the periods presented:
Oil and gas properties
Other
$
$
Year Ended December 31, Favorable
2010
2011
104,688 $
-
104,688 $
(Unfavorable) % Change
NM
NM
NM
(61,621)
2,892
(58,729)
43,067 $
2,892
45,959 $
During 2011, we recognized an impairment of our Arkoma Basin assets for $71.1 million, which was triggered by the expected
disposition of these high-cost gas properties. As described in Note 3, we completed the sale of these properties in August 2011. Also during
2011, we recognized an impairment of our horizontal coal bed methane properties in the Appalachian region for $26.6 million and certain
dry-gas properties in Mississippi for $7.0 million due primarily to market declines in gas prices. During 2010, we incurred impairment
charges related to our Mid-Continent coal bed methane properties as a result of market declines in gas prices and to an area in the Anadarko
Basin of the Mid-Continent region where we drilled an uneconomic well. In addition, we recorded impairment charges attributable to
certain oil and gas inventory assets triggered primarily by declines in asset quality.
31
Other
During 2011, we recorded a reserve of $0.2 million for litigation attributable to properties that were previously sold. This matter was
ultimately settled in January 2012 for the reserved amount. In addition, we wrote down certain gas imbalance assets that originated in prior
years due to lower settlement rates. During 2010, we recorded a loss on the disposition of our Gulf Coast properties.
Interest Expense
The following table summarizes the components of our interest expense for the periods presented:
Interest on borrowings and related fees
Accretion of original issue discount
Amortization of debt issuance costs
Capitalized interest
Other, net
$
$
51,384 $
3,427
3,380
(1,983)
8
56,216 $
(Unfavorable) % Change
(8,324)
4,682
495
599
11
(2,537)
(19)%
58%
13%
43%
58%
(5)%
43,060 $
8,109
3,875
(1,384)
19
53,679 $
Year Ended December 31, Favorable
2010
2011
The issuance of the 2019 Senior Notes at 7.25% and borrowings under the Revolver, offset by the repurchase of approximately 98%
of the outstanding Convertible Notes with an effective interest rate of 8.5%, resulted in an approximate $88 million higher weighted-
average balance of debt outstanding during 2011 as compared to 2010. Accordingly, interest expense increased due to the higher average
outstanding principal balance partially offset by lower effective interest rates attributable to the 2019 Senior Notes and Revolver.
Capitalized interest was higher during 2011 due to higher carrying values on eligible capital projects.
Loss on Extinguishment of Debt
The repurchase in April 2011 of approximately 98% of the outstanding Convertible Notes resulted in a loss on extinguishment of
debt of $24.2 million. The loss was comprised of non-cash charges for the excess of cash paid for the liability component over the carrying
value, plus the write-off of a pro rata share of debt issuance costs and incremental transaction fees paid in cash. In addition, we recognized
a charge of $1.2 million in August 2011 attributable to the Revolver and a change in the composition of the bank syndicate.
Derivatives
The following table summarizes the components of our derivatives income for the periods presented:
Oil and gas derivative unrealized gain (loss)
Oil and gas derivative realized gain
Interest rate swap unrealized gain (loss)
Interest rate swap realized gain (loss)
$
$
(9,140) $
23,562
(2,589)
3,818
15,651 $
Year Ended December 31, Favorable
2010
2011
(Unfavorable) % Change
NM
(30)%
(144)%
NM
(63)%
(12,353)
(9,918)
(8,464)
4,480
(26,255)
3,213 $
33,480
5,875
(662)
41,906 $
We received cash settlements of $27.4 million during 2011 and $32.8 million during 2010. The amount received during 2011
includes $2.9 million attributable to the termination of our interest rate swap.
Other
Other income decreased due primarily to lower interest income earned on average cash balances during 2011 and gains on the sale of
non-operating investments recognized during 2010.
Income Taxes
The effective tax benefit rate for continuing operations during 2011 was 39.9% compared to 39.6% for 2010. Due to the operating
losses incurred, we recognized an income tax benefit during both periods. In addition, the effective tax rate for 2011 includes a deferred tax
asset valuation allowance due primarily to the inability to recognize a tax benefit for certain state net operating losses.
32
Year Ended December 31, 2010 Compared to the Year Ended December 31, 2009
The following table sets forth a summary of certain operating and financial performance for the periods presented:
Year Ended December 31,
2010
2009
Favorable
(Unfavorable) % Change
Total Production:
Natural gas (MMcf)
Crude oil (MBbl)
NGL (MBbl)
Total production (MMcfe)
Realized prices, before derivatives:
Natural gas ($/Mcf)
Crude oil ($/Bbl)
NGL ($/Bbl)
Total ($/Mcfe)
Revenues
Natural gas
Crude oil
NGL
Total product revenues
Gain on sale of property and equipment
Other income
Total revenues
Operating Expenses
Lease operating
Gathering, processing and transportation
Production and ad valorem taxes
General and administrative
Exploration
Depreciation, depletion and amortization
Impairments
Other
Total operating expenses
Operating loss
Other income (expense)
Interest expense
Derivatives
Other
Loss from continuing operations before income taxes
Income tax benefit
Loss from continuing operations
Income from discontinued operations, net of tax
Gain on sale of discontinued operations, net of tax
Net income (loss)
Less net income attributable to noncontrolling interests
Net loss attributable to Penn Virginia Corporation
$
33
$
$
$
38,919
709
672
47,201
43,338
750
527
51,000
4.40 $
75.56
39.69
5.32 $
3.91 $
57.68
29.86
4.48 $
171,141 $
53,532
26,663
251,336
648
2,454
254,438
35,757
14,180
13,917
58,383
49,641
134,700
45,959
709
353,246
169,666 $
43,258
15,735
228,659
2,372
4,175
235,206
44,392
11,307
15,044
49,690
57,754
154,351
106,415
1,599
440,552
(4,419)
(41)
145
(3,799)
0.49
17.88
9.83
0.84
1,475
10,274
10,928
22,677
(1,724)
(1,721)
19,232
8,635
(2,873)
1,127
(8,693)
8,113
19,651
60,456
890
87,306
(98,808)
(205,346)
106,538
(53,679)
41,906
2,403
(108,178)
42,851
(65,327)
33,448
51,546
19,667
(28,090)
(8,423) $
(44,231)
31,568
1,259
(216,750)
85,894
(130,856)
53,488
-
(77,368)
(37,275)
(114,643) $
(9,448)
10,338
1,144
108,572
(43,043)
65,529
(20,040)
51,546
97,035
9,185
106,220
(10)%
(6)%
28%
(7)%
13%
31%
33%
19%
1%
24%
69%
10%
(73)%
(41)%
8%
19%
(25)%
7%
(17)%
14%
13%
57%
56%
20%
52%
(21)%
33%
91%
(50)%
(50)%
(50)%
(37)%
NM
125%
25%
93%
Production
The following tables set forth a summary of our total and daily production volumes by product and geographical region for the
periods presented:
Natural Gas
Year Ended December 31, Favorable Year Ended December 31, Favorable
2010
2009
(Unfavorable)
2010
2009
(Unfavorable) % Change
Texas
Appalachia
Mid-Continent
Mississippi
Gulf Coast (Divested)
Total production
(MMcfe)
10,510
10,358
10,338
7,505
208
38,919
9,966
11,453
9,602
7,694
4,623
43,338
(MMcfe per day)
544
(1,095)
736
(189)
(4,415)
(4,419)
28.8
28.4
28.3
20.6
0.6
106.7
27.3
31.4
26.3
21.1
12.7
118.8
1.5
(3.0)
2.0
(0.5)
(12.1)
(12.1)
5%
(10)%
8%
(2)%
(96)%
(10)%
Crude Oil
Texas
Appalachia
Mid-Continent
Mississippi
Gulf Coast
(Divested)
Total production
NGLs
Texas
Appalachia
Mid-Continent
Gulf Coast
(Divested)
Total production
Year Ended December 31, Favorable Year Ended December 31,
(Unfavorable)
2010
2009
2009
2010
Favorable
(Unfavorable) % Change
(MBbl)
113.5
5.1
559.3
22.9
7.7
708.5
109.9
1.8
476.5
21.3
140.9
750.4
3.6
3.3
82.8
1.6
(133.2)
(41.9)
(MBbl per day)
0.31
0.01
1.53
0.06
0.02
1.93
0.30
0.00
1.31
0.06
0.39
2.06
0.01
0.01
0.22
0.00
(0.37)
(0.13)
3%
183%
17%
7%
(95)%
(6)%
Year Ended December 31, Favorable Year Ended December 31,
(Unfavorable)
2010
2009
2010
2009
Favorable
(Unfavorable) % Change
(MBbl)
389.1
1.4
274.4
6.9
671.8
415.3
0.2
60.8
50.4
526.7
(26.2)
1.2
213.6
(43.5)
145.1
(MBbl per day)
1.07
0.00
0.75
0.02
1.84
1.14
0.00
0.17
0.14
1.45
(0.07)
0.00
0.58
(0.12)
0.39
(6)%
NM
351%
(86)%
28%
Combined Total
Year Ended December 31, Favorable Year Ended December 31, Favorable
2010
2009
(Unfavorable)
2010
2009
(Unfavorable) % Change
Texas
Appalachia
Mid-Continent
Mississippi
Gulf Coast (Divested)
Total production
(MMcfe)
13,526
10,397
15,340
7,643
295
47,201
13,116
11,465
12,826
7,822
5,771
51,000
410
(1,068)
2,514
(179)
(5,476)
(3,799)
(MMcfe per day)
37.1
28.5
42.0
20.9
0.8
129.3
35.9
31.4
35.1
21.5
15.8
139.7
1.2
(2.9)
6.9
(0.6)
(15.0)
(10.4)
3%
(9)%
20%
(2)%
(95)%
(7)%
The decline in production during 2010 was attributable to the disposition of our Gulf Coast properties in January 2010, the
significant reduction in drilling activity in 2009 and natural declines in production rates. We also experienced equipment and service-related
delays in new well completions during the first half of 2010 primarily in the Lower Bossier (Haynesville) Shale play in the Texas region.
The overall decline in production volume was partially offset by production from new wells in the Granite Wash play in the Mid-Continent
region that were brought online during 2010 despite interference attributable to offset wells during stimulation.
NGL production increased to 18% of the total production in 2010 compared to 15% in 2009. In addition, a processing agreement was
signed for a major portion of our Granite Wash production which contributed to the increase in 2010 NGL production.
34
Product Revenues and Prices
The following tables set forth a summary of our revenues and prices per unit of volume by product and geographical region for the
periods presented:
Natural Gas
Texas
Appalachia
Mid-Continent
Mississippi
Gulf Coast (Divested)
Total revenues
Crude Oil
Texas
Appalachia
Mid-Continent
Mississippi
Gulf Coast (Divested)
Total revenues
NGLs
Texas
Appalachia
Mid-Continent
Gulf Coast (Divested)
Total revenues
Combined Total
Texas
Appalachia
Mid-Continent
Mississippi
Gulf Coast (Divested)
Total revenues
Year Ended December 31, Favorable Year Ended December 31,
(Unfavorable)
2010
2009
2010
2009
Favorable
(Unfavorable)
$
$
43,247 $
45,581
47,694
33,351
1,268
171,141 $
36,696 $
46,773
34,115
31,509
20,573
169,666 $
6,551 $
(1,192)
13,579
1,842
(19,305)
1,475 $
($ per Mcfe)
4.11 $
4.40
4.61
4.44
6.10
4.40 $
3.68 $
4.08
3.55
4.10
4.45
3.91 $
0.43
0.32
1.06
0.34
1.65
0.49
Year Ended December 31, Favorable Year Ended December 31,
(Unfavorable)
2009
2009
2010
2010
Favorable
(Unfavorable)
$
$
8,844 $
164
42,176
1,750
598
53,532 $
5,984 $
85
27,828
1,283
8,078
43,258 $
2,860 $
79
14,348
467
(7,480)
10,274 $
($ per Bbl)
77.92 $
32.16
75.41
76.42
77.66
75.56 $
54.45 $
47.22
58.40
60.23
57.33
57.68 $
23.47
(15.06)
17.01
16.19
20.33
17.88
Year Ended December 31, Favorable Year Ended December 31,
(Unfavorable)
2009
2009
2010
2010
Favorable
(Unfavorable)
$
$
15,150 $
51
11,152
310
26,663 $
12,479 $
5
1,777
1,474
15,735 $
2,671 $
46
9,375
(1,164)
10,928 $
($ per Bbl)
38.94 $
36.43
40.64
44.93
39.69 $
30.05 $
25.00
29.23
29.25
29.86 $
8.89
11.43
11.41
15.68
9.83
Year Ended December 31, Favorable Year Ended December 31,
(Unfavorable)
2010
2010
2009
2009
Favorable
(Unfavorable)
$
$
67,241 $
45,796
101,022
35,101
2,176
251,336 $
55,159 $
46,863
63,720
32,792
30,125
228,659 $
12,082 $
(1,067)
37,302
2,309
(27,949)
22,677 $
($ per Mcfe)
4.97 $
4.40
6.59
4.59
7.38
5.32 $
4.21 $
4.09
4.97
4.19
5.22
4.48 $
0.76
0.31
1.62
0.40
2.16
0.84
35
As illustrated below, revenues were higher in 2010 compared to 2009 as the decline in production volume discussed above was more
than offset by improved pricing for all three commodity product types. The following table provides an analysis of the change in our
revenues for the year ended December 31, 2010 as compared to the year ended December 31, 2009:
Natural gas
Crude oil
NGL
Effects of Derivatives
Revenue Variance Due to
Price
Total
Volume
$
(17,301) $
(2,393)
4,323
(15,371) $
$
18,776 $
12,667
6,605
38,048 $
1,475
10,274
10,928
22,677
In 2010 and 2009, we received $33.5 million and $59.9 million in cash settlements of oil and gas derivatives.
The following table reconciles natural gas and crude oil revenues to realized prices, as adjusted for derivative activities, for the
periods presented:
Natural gas revenues as reported
Cash settlements on natural gas derivatives
Natural gas revenues adjusted for derivatives
Natural gas prices per Mcf, as reported
Cash settlements on natural gas derivatives per Mcf
Natural gas prices per Mcf adjusted for derivatives
Crude oil revenues as reported
Cash settlements on crude oil derivatives
Crude oil revenues adjusted for derivatives
Crude oil prices per Bbl, as reported
Cash settlements on crude oil derivatives per Bbl
Crude oil prices per Bbl adjusted for derivatives
Gain on Sales of Property and Equipment
Year Ended December 31, Favorable
2009
169,666 $
55,545
225,211 $
(Unfavorable) % Change
1,475
(21,631)
(20,156)
2010
171,141 $
33,914
205,055 $
1%
(39)%
(9)%
$
$
$
$
$
$
$
$
4.40 $
0.87
5.27 $
3.91 $
1.28
5.19 $
53,532 $
(434)
53,098 $
43,258 $
4,361
47,619 $
75.56 $
(0.61)
74.94 $
57.68 $
5.81
63.49 $
0.49
(0.41)
0.08
10,274
(4,795)
5,479
17.88
(6.43)
11.45
12%
(32)%
2%
24%
(110)%
12%
31%
(111)%
18%
In 2010, we recognized several individually insignificant gains on the sale of property, equipment, tubular inventory and well
materials. In 2009, we recognized gains on the sale of certain properties and equipment in our Texas region.
Other Income
Other income decreased primarily as a result of lower gathering revenues during 2010 and the effect of a favorable audit settlement
during 2009 partially offset by higher compression services revenues.
Operating Expenses
The following table summarizes certain of our operating expenses per Mcfe for the periods presented:
Lease operating
Gathering, processing and transportation
Production and ad valorem taxes
General and administrative excluding share-based
compensation and restructuring charges
General and administrative
Depreciation, depletion and amortization
$
0.76 $
0.30
0.29
0.90
1.24
2.85
36
Year Ended December 31,
2010
2009
Favorable
(Unfavorable) % Change
0.11
(0.08)
0.00
13%
(36)%
0%
0.87 $
0.22
0.29
0.78
0.97
3.03
(0.12)
(0.27)
0.18
(15)%
(27)%
6%
Lease Operating
The most significant decline in lease operating expenses resulted from decreases in charges that are generally correlated with
production volume including water disposal, compressor and other equipment rentals, contract labor, chemical and treating and repairs and
maintenance costs.
Gathering, Processing and Transportation
Gathering, processing and transportation charges increased during 2010 primarily as a result of a settlement with a gathering services
provider attributable to disputed charges in several prior periods, as well as a change in the geographic distribution of production from the
Gulf Coast to the Mid-Continent region where we typically experience higher processing costs associated with NGLs. These items were
offset partially by the effects of lower volume in the current period.
Production and Ad Valorem Taxes
Production and ad valorem taxes decreased on an absolute basis by $1.1 million primarily reflecting ad valorem tax settlements of
approximately $1.4 million with certain jurisdictions attributable to prior periods, while production taxes increased commensurately with
higher revenues. As a percentage of revenue, production and ad valorem taxes, excluding the settlements, decreased to 6.1% in 2010 from
6.6% during 2009.
General and Administrative
The following table sets forth the components of general and administrative expenses for the periods presented:
Recurring general and administrative expenses
Share-based compensation
Restructuring expenses
$
$
42,372 $
7,811
8,200
58,383 $
Year Ended December 31, Favorable
2009
2010
(Unfavorable) % Change
(2,338)
1,316
(7,671)
(8,693)
40,034 $
9,127
529
49,690 $
NM
(17)%
(6)%
14%
Recurring general and administrative expenses increased in 2010 due primarily to higher consulting and professional fees attributable
to our divestiture of Penn Virginia GP Holdings, L.P., or PVG. Share-based compensation charges decreased during 2010 due primarily to a
smaller population of employees receiving awards. Restructuring expenses during both 2010 and 2009 include costs associated with the
organization restructuring announced during November 2009. These costs include termination benefits, office and employee relocation
costs as well as a $3.5 million charge related to the assignment of our lease of our former Kingsport, Tennessee office.
Exploration
The following table sets forth the components of exploration expenses for the periods presented:
Dry hole costs
Geological and geophysical costs
Unproved leasehold amortization
Drilling rig charges
Other, primarily delay rentals
$
$
11,282 $
10,168
24,993
-
3,198
49,641 $
(Unfavorable) % Change
NM
(9,885)
(9,256)
NM
6,625
20,084
545
8,113
1,397 $
912
31,618
20,084
3,743
57,754 $
NM
15%
14%
21%
Year Ended December 31, Favorable
2009
2010
The decrease in exploration expense is attributable primarily to rig standby charges incurred during 2009. These charges were a result
of our 2009 drilling program reduction due to unfavorable economic conditions. In addition, the 2009 period reflects the initial impact of a
change in accounting estimate to amortize collectively insignificant unproved properties over the average estimated life of the leases rather
than amortizing some leases and assessing other leases individually. The decrease was offset partially by dry hole costs in the Mid-
Continent region incurred during 2010 and higher geological and geophysical costs attributable to our larger 2010 exploration program.
37
Depreciation, Depletion and Amortization (DD&A)
The following tables set forth the components of DD&A and the nature of the variances for the periods presented:
Depletion
Depreciation - Oil and gas operations
Depreciation - Corporate
Amortization
Year ended December 31, 2010 compared to 2009
(Unfavorable) % Change
$
Year Ended December 31, Favorable
2009
147,174 $
2,756
3,922
499
154,351 $
2010
127,836 $
2,536
3,884
444
134,700 $
19,338
220
38
55
19,651
$
13%
8%
1%
11%
13%
DD&A Variance Due to
Rates
Total
Production
$
11,499 $
8,152 $
19,651
Our average depletion rate decreased by $0.18 per Mcfe, or 6%, to $2.71 per Mcfe in 2010, from $2.89 per Mcfe in 2009. The
reduction was a result of discoveries and the impact of impairments in 2010.
Impairments
The following table summarizes the impairments recorded for the periods presented:
Year Ended December 31, Favorable
2009
2010
(Unfavorable) % Change
Oil and gas properties
Other
$
$
43,067 $
2,892
45,959 $
102,332 $
4,083
106,415 $
59,265
1,191
60,456
58%
29%
57%
During 2010, we incurred impairment charges related to our Mid-Continent coal bed methane properties as a result of market declines
in gas prices and to an area in the Anadarko basin of the Mid-Continent region where we drilled an uneconomic well. In addition, we
recorded impairment charges attributable to certain oil and gas inventory assets triggered primarily by declines in asset quality. We also
incurred impairment charges on properties in North Dakota that were held for sale at the end of 2009. These properties were ultimately sold
during 2010. During 2009, we incurred impairment charges in connection with the initial classification of the Gulf Coast properties as
assets held for sale at their fair value less costs to sell, as well as impairments attributable to tubular inventory and other oil and gas
properties.
Other
During 2010, we recorded a loss of $0.7 million on the disposition of our Gulf Coast properties. The loss reflects final purchase price
adjustments associated with the period from the effective date in October 2009 to the closing date in January 2010. The 2009 period reflects
a loss on the sales of tubular inventory and well materials.
Interest Expense
The following table summarizes the components of our total interest expense for the periods presented:
Interest on borrowings and related fees
Accretion of original issue discount
Amortization of debt issuance costs
Interest rate swaps
Capitalized interest
Other, net
$
$
43,060 $
8,109
3,875
-
(1,384)
19
53,679 $
38
Year Ended December 31, Favorable
2009
2010
(Unfavorable) % Change
(9,686)
(586)
(1,196)
3,969
(934)
(1,015)
(9,448)
(29)%
(8)%
(45)%
NM
(40)%
(102)%
(21)%
33,374 $
7,523
2,679
3,969
(2,318)
(996)
44,231 $
Interest expense increased due to higher interest rates on outstanding borrowings, primarily the 10.375% Senior Unsecured Notes, or
2016 Senior Notes, issued in June 2009. We realized higher amortization of the original issue discount and issuance costs on the 2016
Senior Notes and Convertible Notes, as well as higher amortization of issuance costs associated with the Revolver. In addition, 2009
included a reclassification of expense from accumulated other comprehensive income, or AOCI, attributable to the discontinuation of hedge
accounting related to our interest rate swaps, as well as a reversal of interest cost attributable to the settlement of various state income tax
positions.
Derivatives
The following table summarizes the components of our derivatives income for the periods presented:
Year Ended December 31, Favorable
2009
2010
(Unfavorable) % Change
Oil and gas derivative unrealized gain (loss)
Oil and gas derivative realized gain
Interest rate swap unrealized gain
Interest rate swap realized loss
$
$
3,213 $
33,480
5,875
(662)
41,906 $
(26,690) $
59,908
111
(1,761)
31,568 $
29,903
(26,428)
5,764
1,099
10,338
112%
(44)%
NM
62%
33%
Cash received for settlements during 2010 was $32.8 million as compared to $58.1 million during 2009.
Other
Other income increased during 2010 due primarily to the gains on the sale of non-operating investments as well as higher interest
income on the significantly larger cash balances held following of the disposition of our interests in PVG.
Income Taxes
The effective tax benefit rate for continuing operations was 39.6% for 2010 and 2009. Due to the operating losses incurred, we
recognized an income tax benefit during both periods.
Discontinued Operations
The following table presents a summary of results of operations from discontinued operations for the periods presented:
Revenues
Year Ended December 31, Favorable
2009
579,931 $
2010
303,206 $
(Unfavorable) % Change
48%
(276,725)
$
Income from discontinued operations before taxes
Income tax expense 1
Income from discontinued operations, net of taxes
$
$
36,832 $
(3,384)
33,448 $
64,130 $
(10,642)
53,488 $
(27,298)
7,258
(20,040)
43%
68%
37%
1 Determined by applying the effective tax rate attributable to discontinued operations to the income from discontinued operations less
noncontrolling interests that are fully attributable to PVG's operations.
The disclosures for 2010 provided in the table above reflect the results of operations of PVG through the date of disposition of our
entire remaining interest in PVG on June 7, 2010.
39
Gain on Sale of Discontinued Operations
The following table summarizes the determination of the gain recognized upon the disposition of PVG:
Cash proceeds, net of offering costs (8,827,429 units x $15.76 per unit)
Carrying value of noncontrolling interests in PVG at date of disposition
Less: Carrying value of PVG's assets and liabilities at date of disposition
Less: Income tax expense
Gain on sale of discontinued operations, net of tax
Noncontrolling Interests
$
$
139,120
382,324
521,444
(434,782)
86,662
(35,116)
51,546
The decrease in net income attributable to noncontrolling interests during 2010 is directly attributable to the sale of our interests in
PVG during June 2010. In September 2009, our ownership interest in PVG declined from 77.0% to 51.4% and in 2010 our ownership
interest in PVG declined to zero.
40
Liquidity and Capital Resources
Sources of Liquidity
We are currently meeting our capital expenditures and working capital funding requirements with a combination of operating cash
flows and borrowings from our Revolver. We have no material debt maturities until 2016. Our business strategy for 2012 requires capital
expenditures in excess of our anticipated operating cash flows. Subject to the variability of commodity prices that impact our operating cash
flows, anticipated timing of our capital projects and unanticipated expenditures such as acquisitions, we plan to fund our 2012 capital
program with operating cash flows and borrowings from our Revolver. We expect to supplement these sources of liquidity with proceeds
from the sale of non-core assets or, possibly, by accessing the capital markets. There can be no assurance that such actions would be
successful, however, in which case we could reduce our 2012 planned capital expenditures.
In August 2011, we entered into the Revolver which matures in August 2016. The Revolver provides for a $300 million revolving
commitment, including a $20 million sublimit for the issuance of letters of credit. The Revolver has a borrowing base of $380 million.
There is an accordion feature that allows us to increase the commitment up to the lower of the borrowing base or $600 million upon
receiving additional commitments from one or more lenders. The Revolver is available to us for general purposes including working
capital, capital expenditures and acquisitions.
The borrowing base is redetermined semi-annually, and the next redetermination is scheduled to occur during April 2012. The
primary assets supporting our borrowing base are our proved developed reserves, approximately 77% of which are natural gas. Due
primarily to the significant decline in natural gas prices that has continued into the first quarter of 2012 and despite the increase in our oil
reserves, we anticipate a potentially material reduction in our borrowing base from its current level of $380 million. As of the date of this
filing, we are unable to determine a meaningful potential range of the reduction, due primarily to the fact that a number of determinative
variables are not known at this time; however, we do not anticipate a material reduction to our current Revolver commitment of $300
million. Accordingly, our current business plans anticipate us borrowing amounts under the Revolver that are within the current
commitment level of $300 million.
As of February 21, 2012, we had approximately $11 million of cash on hand and $182.6 million of unused borrowing capacity under
our Revolver. The borrowing capacity is determined by reducing the revolving commitment of $300 million by outstanding borrowings of
$116.0 million and outstanding letters of credit of $1.4 million.
The following table summarizes our borrowing activity under the Revolver during the periods presented:
Three months ended December 31, 2011
August 2, 2011 through December 31, 20111
Borrowings Outstanding
Weighted-
Average
Maximum Average Rate
Weighted-
$
$
61,696 $
44,974 $
99,000
99,000
1.9448%
1.9118%
1 There were no amounts outstanding under the previous credit facility from January 1, 2011 through its termination date of August 2,
2011.
Our revenues are subject to significant volatility as a result of changes in commodity prices. Accordingly, we actively manage the
exposure of our operating cash flows to commodity price fluctuations by hedging the commodity price risk for a portion of our expected
production through the use of derivatives, typically collar, swap and swaption contracts. The level of our hedging activity and duration of
the instruments employed depend upon our cash flow at risk, available hedge prices and our operating strategy. During 2011, our
commodity derivatives portfolio provided $22.2 million of cash inflows related to lower than anticipated prices received for our natural gas
production and $1.4 million of cash inflows attributable to lower than anticipated prices received for our crude oil production.
In January 2012, we amended the Revolver to enhance our ability to hedge production. Previously, our hedging was limited to the
lesser of certain fixed percentages of our reasonably anticipated production from proved developed reserves and total proved reserves. The
amendment expands the potential volume subject to hedging to certain percentages of reasonably anticipated production from proved
undeveloped reserves as well as proved developed reserves.
For 2012, we have hedged approximately 32% of our estimated natural gas production, at a weighted average floor/swap price and
ceiling prices of between $5.43 and $6.05 per MMBtu. In addition, we have hedged approximately 47% of our estimated crude oil
production for 2012, at weighted average floor/swap and ceiling prices of between $97.08 and $99.61 per barrel.
41
Cash Flows
The following table summarizes our statements of cash flows for the periods presented:
Year Ended December 31,
Cash flows from operating activities
Cash flows from investing activities
Capital expenditures - property and equipment
Proceeds from the sale of PVG units, net
Proceeds from sales of property and equipment and other, net
Net cash used in investing activities
Cash flows from financing activities
Dividends paid
Proceeds from revolving credit facility borrowings, net
Proceeds from issuance of Senior Notes due 2019
Repurchase of Convertible Notes
Debt issuance costs paid
Proceeds from sale of PVG units, net
Distributions received from discontinued operations
Other, net
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash Flows From Operating Activities
2011
2010
$
144,741 $
Variance
64,902
79,839 $
(445,623)
-
39,468
(406,155)
(405,994)
139,120
26,759
(240,115)
(10,316)
99,000
300,000
(232,963)
(8,854)
-
-
1,148
148,015
(113,399) $
(10,271)
-
-
-
-
199,125
11,218
2,098
202,170
41,894 $
(39,629)
(139,120)
12,709
(166,040)
(45)
99,000
300,000
(232,963)
(8,854)
(199,125)
(11,218)
(950)
(54,155)
(155,293)
$
The following table summarizes the most significant variances in our cash flows from operating activities:
Cash flows from operating activities for the year ended December 31, 2010
Variances due to:
Lower settlements from commodity derivatives portfolio
Higher interest payments, net of amounts capitalized
Lower restructuring costs paid
Lower tax payments
Transaction costs paid in connection with extinguishment of debt
Effect of higher operating margins, net of working capital changes
Cash flows from operating activities for the year ended December 31, 2011
$
$
79,839
(9,918)
(960)
6,826
27,974
(2,433)
43,413
144,741
Due primarily to the realization of higher net margins on our expanding crude oil and NGL production, our cash flows from
operating activities improved significantly during 2011 as compared to 2010. During 2011, we realized lower settlements from our
commodity derivatives portfolio as compared to 2010 due primarily to higher realized natural gas prices as well as lower overall hedged
production volume. Interest payments on our debt were higher during 2011 due to higher average outstanding balances partially offset by a
favorable settlement of $2.9 million upon the termination of our interest rate swap. Restructuring costs paid were lower during 2011 as
compared to 2010 due primarily to the larger scale of restructuring activities during 2010, which included, among other costs, a $3.5 million
payment for the assignment of the lease of a former office. Income tax payments were significantly lower during 2011 as compared to 2010
as the prior year included higher income tax payments primarily attributable to the gain realized on the sale of our interests in PVG. During
2011, we paid incremental transaction costs in connection with the extinguishment of our Convertible Notes as well as costs attributable to
the change in the composition of the bank syndicate in connection with the Revolver.
Cash Flows From Investing Activities
Capital expenditures were higher during 2011 due primarily to significant investment in our Eagle Ford Shale properties, including
lease acquisition costs of approximately $30 million and development and exploratory drilling expenditures of approximately $372 million.
Included in our capital expenditures for 2011 was approximately $12 million for proppant chemicals used in our well completion activities.
These expenditures occurred near the end of 2011, and we are consuming these materials in connection with our 2012 capital projects.
Previously, these products were provided by our well completion vendors in connection with their service offerings. Our purchase of these
materials directly from product suppliers is expected to result in lower costs of well completions due to favorable pricing. Capital
expenditures during 2010 included significant property acquisitions in the Marcellus Shale and our initial acreage in the Eagle Ford Shale
as well as significant exploratory and development drilling expenditures primarily in the Granite Wash in the Mid-Continent region. These
expenditures were partially offset during both years by proceeds received from the sale of non-core assets, mostly comprised of our
Arkoma Basin assets in 2011 and our Gulf Coast assets in 2010. In addition, we received proceeds in 2010 from the sale of our remaining
interests in PVG.
42
The following table sets forth costs related to our capital expenditure programs for the periods presented:
Oil and gas:
Development drilling
Exploration drilling
Seismic
Lease acquisitions, field projects and other
Pipeline and gathering facilities
Other - Corporate
Total capital program costs
Year Ended December 31,
2011
2010
$
$
307,779 $
64,075
11,202
50,060
12,484
445,600
1,148
446,748 $
243,446
54,340
10,168
140,473
1,407
449,834
1,337
451,171
The following table reconciles the total costs of our capital expenditures programs with the net cash paid for capital expenditures for
additions to property and equipment as reported in our Consolidated Statements of Cash Flows for the periods presented:
Total capital program costs
Less:
Exploration expenses
Seismic
Other, primarily delay rentals
Other
Changes in accrued capitalized costs
Property received as consideration in sale transaction 1
Add:
Capitalized interest
Well materials purchased in advance of drilling
Other
Total cash paid for capital expenditures
Year Ended December 31,
2011
446,748 $
2010
451,171
$
(11,202)
(2,183)
(912)
(744)
-
1,983
11,833
100
445,623 $
(10,168)
(2,379)
-
(20,197)
(8,204)
1,384
-
(5,613)
405,994
$
1 Represents property received in Mississippi in connection with the sale of our Gulf Coast properties.
Cash Flows From Financing Activities
Cash provided by financing activities during 2011 included the issuance of $300 million of 2019 Senior Notes, offset substantially by
the repurchase of approximately 98% of our Convertible Notes and related transaction costs. During the third quarter of 2011, we began
borrowing under our Revolver. In addition, we paid dividends totaling $10.3 million on our common stock.
During April 2010, we sold 11.25 million common units of PVG for proceeds of $199.1 million, net of offering costs, which reduced
our limited partner interest in PVG to 22.6%. Because we maintained a controlling financial interest in PVG until the final sale, the
proceeds from these transactions are reported as cash flows from financing activities. In addition, we received $11.2 million in distributions
from PVG prior to our complete divestiture in 2010 as well as $2.1 million from the exercise of stock options by employees. We also paid
dividends totaling $10.3 million on our common stock.
43
Financial Condition
As of February 21, 2012, we had approximately $11 million of cash on hand and $182.6 million of unused borrowing capacity under
our Revolver. The borrowing capacity is determined by reducing the revolving commitment of $300 million by outstanding borrowings of
$116.0 million and outstanding letters of credit of $1.4 million.
Debt and Credit Facilities
Revolving credit facility
Senior notes due 2016, net of discount (principal amount of $300,000)
Senior notes due 2019
Convertible notes due 2012, net of discount (principal amount of $4,915 and $230,000)
Less: Current portion of long-term debt
As of December 31,
2010
2011
99,000 $
293,561
300,000
4,746
697,307
(4,746)
692,561 $
-
292,487
-
214,049
506,536
-
506,536
$
$
Revolving Credit Facility. Borrowings under the Revolver bear interest, at our option, at either (i) a rate derived from LIBOR, as
adjusted for statutory reserve requirements for Eurocurrency liabilities, or Adjusted LIBOR, plus an applicable margin ranging from
1.500% to 2.500% or (ii) the greater of (a) the prime rate, (b) the federal funds effective rate plus 0.5% or (c) the one-month Adjusted
LIBOR plus 1.0%, and, in each case, plus an applicable margin (ranging from 0.500% to 1.500%). The applicable margin is determined
based on the ratio of our outstanding borrowings to the available Revolver capacity. Commitment fees are being charged at 0.375%
increasing to 0.500% on the undrawn portion of the Revolver as determined by our ratio of outstanding borrowings to the available
Revolver capacity. As of December 31, 2011, the effective interest rate on the borrowings under the Revolver was 2.0625%.
The Revolver is guaranteed by Penn Virginia and the Guarantor Subsidiaries. The obligations under the Revolver are secured by a
first priority lien on substantially all of our proved oil and gas reserves and a pledge of the equity interests in the Guarantor Subsidiaries.
2016 Senior Notes. The 2016 Senior Notes bear interest at an annual rate of 10.375% payable on June 15 and December 15 of each
year. The 2016 Senior Notes were sold at 97% of par, equating to an effective yield to maturity of approximately 11%. The 2016 Senior
Notes are senior to our existing and future subordinated indebtedness and are effectively subordinated to all of our secured indebtedness,
including the Revolver, to the extent of the collateral securing that indebtedness. The obligations under the 2016 Senior Notes are fully and
unconditionally guaranteed by the Guarantor Subsidiaries.
Under the Revolver, we are permitted under certain conditions to repurchase up to $100 million of the 2016 Senior Notes until
August 2012. Accordingly, we may, from time to time, seek to repurchase the 2016 Senior Notes through open market purchases or
privately negotiated transactions. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements,
contractual restrictions and other factors.
2019 Senior Notes. The 2019 Senior Notes, which were issued at par in April 2011, bear interest at an annual rate of 7.25% payable
on April 15 and October 15 of each year. The 2019 Senior Notes are senior to our existing and future subordinated indebtedness and are
effectively subordinated to all of our secured indebtedness, including the Revolver, to the extent of the collateral securing that
indebtedness. The obligations under the 2019 Senior Notes are fully and unconditionally guaranteed by the Guarantor Subsidiaries.
Convertible Notes. The Convertible Notes, which mature in November 2012, are convertible into cash up to the principal amount
thereof and shares of our common stock, if any, in respect of the excess conversion value, based on an initial conversion rate of 17.3160
shares of common stock per $1,000 principal amount of the Convertible Notes (which is equal to an initial conversion price of
approximately $57.75 per share of common stock), subject to adjustment. The Convertible Notes bear interest at an annual rate of 4.50%
payable on May 15 and November 15 of each year.
The Convertible Notes are unsecured senior subordinated obligations, ranking junior in right of payment to any of our senior
indebtedness and to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness and equal in right of
payment to any of our future unsecured senior subordinated indebtedness. The Convertible Notes will rank senior in right of payment to any
of our future junior subordinated indebtedness and will structurally rank junior to all existing and future indebtedness of our Guarantor
Subsidiaries.
In connection with a tender offer completed in April 2011, the Company repurchased $225.1 million aggregate principal amount of
the Convertible Notes for $233.0 million reflecting a premium of $35 per $1,000 principal amount. The tender offer resulted in the
extinguishment of approximately 98% of the outstanding Convertible Notes. The tender offer was funded with the net proceeds of the 2019
Senior Notes. Subsequent to the tender offer, a total of $4.9 million aggregate principal amount of Convertible Notes remain outstanding.
The remaining unamortized discount will be amortized through November 2012.
44
Asset Dispositions
During 2011 and 2010, we completed a number of non-core asset dispositions in addition to other debt and capital raising activities in
connection with a broader effort to supplement the funding of our capital expenditures program. The following table summarizes the net
cash realized from these dispositions during the years ended December 31, 2011 and 2010:
Asset Description
PVG common units1
Oil and gas properties
Other
Year Ended December 31,
2011
2010
$
$
- $
39,368
100
39,468 $
338,245
25,567
1,192
365,004
1 Of the total received during 2010, $199.1 million has been reported as cash received from financing activities and $139.1 million has
been reported as cash received from investing activities.
Covenant Compliance
Our Revolver requires us to maintain certain financial covenants as follows:
·
·
Total debt to EBITDAX, each as defined in the Revolver, for any four consecutive quarters may not exceed 4.5 to 1.0
reducing to 4.0 to 1.0 for periods ending after June 30, 2013. EBITDAX, which is a non-GAAP measure, generally means
net income plus interest expense, taxes, depreciation, depletion and amortization expenses, exploration expenses,
impairments and other non-cash charges or losses.
The current ratio, as of the last day of any quarter, may not be less than 1.0 to 1.0. The current ratio is generally defined as
current assets to current liabilities. Current assets and current liabilities attributable to derivative instruments are excluded. In
addition, current assets include the amount of any unused commitment under the Revolver.
As of December 31, 2011 and through the date upon which the Condensed Consolidated Financial Statements were issued, we were in
compliance with these financial covenants.
The following table summarizes the actual results of our financial covenant compliance under the Revolver as of and for the period
ended December 31, 2011:
Description of Covenant
Total debt to EBITDAX
Current ratio
Required Actual
Results
Covenant
< 4.5 to 1
> 1.0 to 1
3.1 to 1
3.2 to 1
In the event that we would be in default of a covenant under the Revolver, we could request a waiver of the covenant from our bank
group. Should the banks deny our request to waive the covenant requirement, the outstanding borrowings under the Revolver would
become payable on demand and would be reclassified as a component of current liabilities on our Condensed Consolidated Balance Sheets.
In addition to the financial covenants, the Revolver imposes limitations on dividends as well as limits the ability to incur
indebtedness, grant liens, make certain loans, acquisitions and investments, make any material change to the nature of our business, or enter
into a merger or sale of our assets, including the sale or transfer of interests in our subsidiaries.
Future Capital Needs and Commitments
Subject to commodity prices and the availability of capital, we expect to expand our operations over the next several years by
continuing to execute a program focused on development drilling and, to a lesser extent, exploration drilling, supplemented periodically
with property and reserve acquisitions.
In 2012, we anticipate making capital expenditures, excluding any additional acquisitions, of up to approximately $325 million. The
capital expenditures have been and will continue to be funded primarily by operating cash flows and borrowings under the Revolver. We
expect to supplement these sources of liquidity with proceeds from the sale of non-core assets or by accessing the capital markets.
However, there can be no assurance that such actions would be successful. We continually review drilling and other capital expenditure
plans and may change the amount we spend in any area based on available opportunities, industry conditions, cash flows provided by
operating activities and the availability of capital.
45
We expect to allocate approximately 85% of our capital expenditures to Eagle Ford Shale projects and approximately eight percent to
projects, primarily non-operated development drilling, in the Mid-Continent region. The remainder will be allocated primarily to lease
acquisitions, pipeline, gathering, seismic and facilities.
Off-Balance Sheet Arrangements
We may enter into off-balance sheet arrangements and transactions that can give rise to material off-balance sheet obligations. As of
December 31, 2011, the material off-balance sheet arrangements and transactions that we have entered into included operating lease
arrangements, drilling commitments, hydraulic fracturing service commitments, firm transportation agreements and letters of credit, all of
which are customary in our business. See Contractual Obligations summarized below for more details related to the value of off-balance
sheet arrangements. We did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred
to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet
arrangements or other contractually narrow or limited purposes. We are, therefore, not materially exposed to any financing, liquidity,
market or credit risk that could arise if we had engaged in such relationships.
Contractual Obligations
The following table summarizes our contractual obligations as of December 31, 2011:
Revolver
Senior Notes due 2016 1
Senior Notes due 2019
Convertible Notes 2
Interest expense 3
Asset retirement obligations 4
Derivatives 5
Rental commitments 6
Firm transportation and drilling
Total contractual obligations 7
Payments Due by Period
Total
Less than
1 Year
1-3 Years
3-5 Years
More Than
5 Years
$
$
99,000 $
293,561
300,000
4,746
312,768
6,283
10,399
12,188
89,441
1,128,386 $
- $
-
-
4,746
55,138
-
3,549
3,120
34,075
100,628 $
- $
-
-
-
109,834
-
6,850
4,020
15,001
135,705 $
99,000 $
293,561
-
-
93,421
-
-
3,085
9,408
498,475 $
-
-
300,000
-
54,375
6,283
-
1,963
30,957
393,578
1 Upon its maturity in June 2016, the principal amount of $300.0 million will be due.
2 Upon its maturity in November 2012, the principal amount of $4.9 million will be due.
3 Represents estimated interest payments that will be due under the 2016 Senior Notes and 2019 Senior Notes, the Convertible Notes and the
Revolver. Interest payments on the Revolver were calculated by assuming that the December 31, 2011 outstanding balance of $99.0
million will remain outstanding through the August 2016 maturity date. A constant rate of 2.0625% was assumed. Actual results will
differ from these estimates and assumptions.
4 The undiscounted balance was approximately $36.7 million as of December 31, 2011.
5 Represents estimated payments that we will make resulting from commodity derivatives.
6 Relates primarily to equipment and building leases.
7 Total contractual obligations do not include anticipated 2012 capital expenditures.
46
Environmental Matters
Extensive federal, state and local laws govern oil and natural gas operations, regulate the discharge of materials into the environment
or otherwise relate to the protection of the environment. Numerous governmental departments issue rules and regulations to implement and
enforce such laws that are often difficult and costly to comply with and which carry substantial administrative, civil and even criminal
penalties for failure to comply. Some laws, rules and regulations relating to protection of the environment may, in certain circumstances,
impose “strict liability” for environmental contamination, rendering a person liable for environmental and natural resource damages and
cleanup costs without regard to negligence or fault on the part of such person. Other laws, rules and regulations may restrict the rate of oil
and natural gas production below the rate that would otherwise exist or even prohibit exploration or production activities in sensitive areas.
In addition, state laws often require some form of remedial action to prevent pollution from former operations, such as plugging of
abandoned wells. As of December 31, 2011, we have recorded asset retirement obligations of $6.3 million attributable to these activities.
The regulatory burden on the oil and natural gas industry increases its cost of doing business and consequently affects its profitability.
These laws, rules and regulations affect our operations, as well as the oil and gas exploration and production industry in general. We
believe that we are in substantial compliance with current applicable environmental laws, rules and regulations and that continued
compliance with existing requirements will not have a material impact on our financial condition or results of operations. Nevertheless,
changes in existing environmental laws or the adoption of new environmental laws, including any significant limitation on the use of
hydraulic fracturing, have the potential to adversely affect our operations.
Critical Accounting Estimates
The process of preparing financial statements in accordance with accounting principles generally accepted in the United States of
America requires our management to make estimates and judgments regarding certain items and transactions. It is possible that materially
different amounts could be recorded if these estimates and judgments change or if the actual results differ from these estimates and
judgments. We consider the following to be the most critical accounting estimates requiring judgment of our management.
Oil and Gas Reserves
The estimates of oil and gas reserves are the single most critical estimate included in our Consolidated Financial Statements. Reserve
estimates become the basis for determining depletive write-off rates, recoverability of historical cost investments and the fair value of
properties subject to potential impairments. There are many uncertainties inherent in estimating crude oil and natural gas reserve quantities,
including projecting the total quantities in place, future production rates and the amount and timing of future development expenditures. In
addition, reserve estimates of new discoveries are less precise than those of producing properties due to the lack of a production history.
Accordingly, these estimates are subject to change as additional information becomes available.
There are several factors which could change our estimates of oil and gas reserves. Significant rises or declines in product prices
could lead to changes in the amount of reserves as production activities become more or less economical. An additional factor that could
result in a change of recorded reserves is the reservoir decline rates differing from those assumed when the reserves were initially recorded.
Estimation of future production and development costs is also subject to change partially due to factors beyond our control, such as energy
costs and inflation or deflation of oil field service costs.
Oil and Gas Properties
We use the successful efforts method to account for our oil and gas properties. Under this method, costs of acquiring properties, costs
of drilling successful exploration wells and development costs are capitalized. Geological and geophysical costs, delay rentals and costs to
drill exploratory wells that do not find proved reserves are expensed as oil and gas exploration. We will carry the costs of an exploratory
well as an asset if the well has found a sufficient quantity of reserves to justify its completion as a producing well and as long as we are
making sufficient progress assessing the reserves and the economic and operating viability of the project. For certain projects, it may take
us more than one year to evaluate the future potential of the exploratory well and make a determination of its economic viability. Our
ability to move forward on a project may be dependent on gaining access to transportation or processing facilities or obtaining permits and
government or partner approval, the timing of which is beyond our control. In such cases, exploratory well costs remain suspended as long
as we are actively pursuing access to necessary facilities and access to such permits and approvals and believe that they will be obtained.
We assess the status of suspended exploratory well costs on a quarterly basis.
A portion of the carrying value of our oil and gas properties is attributable to unproved properties. At December 31, 2011, the costs
attributable to unproved properties, net of accumulated amortization, were $120.3 million. Unproved properties whose acquisition costs are
insignificant to total oil and gas properties are amortized as a component of exploration expense in the aggregate over the lesser of five
years or the average remaining lease term. We assess unproved properties whose acquisition costs are relatively significant, if any, for
impairment on a property-by-property basis. As exploration work progresses and the reserves on properties are proven, capitalized costs of
these properties are subject to depreciation and depletion. If the exploration work is unsuccessful, the capitalized costs of the properties
related to the unsuccessful work is charged to exploration expense. The timing of any write-downs of any significant unproved properties
depends upon the nature, timing and extent of future exploration and development activities and their results.
47
Depreciation, Depletion and Amortization
We determine depreciation and depletion of oil and gas producing properties by the units-of-production method and these amounts
could change with revisions to estimated proved recoverable reserves. We compute depreciation and amortization of other property and
equipment using the straight-line balance method over the estimated useful life of each asset.
Derivative Activities
From time to time, we enter into derivative instruments to mitigate our exposure to natural gas and crude oil price volatility and
interest rate fluctuations. The derivative financial instruments, which are placed with financial institutions that we believe are acceptable
credit risks, take the form of collars, swaps and swaptions, among others. All derivative instruments are recognized in our Consolidated
Financial Statements at fair value. The fair values of our derivative instruments are determined based on discounted cash flows derived
from quoted forward prices and rates. All derivative transactions are subject to our risk management policy, which has been reviewed and
approved by our board of directors.
Deferred Tax Valuation Allowance
The Company records a valuation allowance to reduce its deferred tax assets to an amount that is more likely than not to be realized
after consideration of future taxable income and reasonable tax planning strategies. In the event that the Company were to determine that it
would not be able to realize all or a part of its deferred tax assets for which a valuation allowance had not been established, an adjustment to
the deferred tax asset will be reflected in income in the period such determination is made. The most significant matter applicable to the
realization of the Company’s deferred tax assets is attributable to net operating losses in certain states. Estimates of future taxable income
inherently reflect a significant degree of uncertainty. During the years ended December 31, 2011, 2010 and 2009, the Company increased
the valuation allowance for its deferred tax assets due primarily to its inability to project sufficient future taxable income in certain states.
New Accounting Standards
During 2011, no new accounting standards were adopted or were pending adoption that would have a significant impact on our
Consolidated Financial Statements and Notes to the Consolidated Financial Statements.
Item 7A Quantitative and Qualitative Disclosures About Market Risk
Market risk is the risk of loss arising from adverse changes in market rates and prices. The principal market risks to which we are
exposed are interest rate risk and commodity price risk.
Interest Rate Risk
All of our long-term debt instruments, with the exception of the Revolver, have fixed interest rates. Accordingly, changes in interest
rates do not affect the amount of interest we pay on our fixed-rate debt instruments. However, changes in interest rates will affect the fair
value of our long-term debt instruments. Our interest rate risk is attributable to our borrowings under the Revolver which is subject to
variable interest rates. As of December 31, 2011, we had borrowings of $99 million outstanding under the Revolver at an interest rate of
2.0625%. Assuming a constant borrowing level of $99 million under the Revolver, an increase (decrease) in the interest rate of one percent
would result in an increase (decrease) in interest expense approximately $1 million on an annual basis.
Commodity Price Risk
We produce and sell natural gas, crude oil and NGLs. As a result, our financial results are affected when prices for these
commodities fluctuate. Our price risk management programs permit the utilization of derivative financial instruments (such as collars,
swaps and swaptions) to seek to mitigate the price risks associated with fluctuations in natural gas, crude oil and NGL prices as they relate
to a portion of our anticipated production. The derivative instruments are placed with major financial institutions that we believe are of
acceptable credit risk. The fair values of our derivative instruments are significantly affected by fluctuations in the prices of natural gas,
crude oil and NGLs.
As of December 31, 2011, we reported a commodity derivative asset of $19.0 million. The contracts associated with this position are
with six counterparties, all of which are investment grade financial institutions, and are substantially concentrated with three of those
counterparties. This concentration may impact our overall credit risk, either positively or negatively, in that these counterparties may be
similarly affected by changes in economic or other conditions. We neither paid nor received collateral with respect to our derivative
positions. No significant uncertainties exist related to the collectability of amounts that may be owed to us by these counterparties. The
maximum amount of loss due to credit risk if counterparties to our derivative asset positions fail to perform according to the terms of the
contracts would be equal to the fair value of the contracts as of December 31, 2011.
In 2011, we reported net commodity derivative gains of $14.4 million. We have experienced and could continue to experience
significant changes in the estimate of derivative gains or losses recognized due to fluctuations in the value of our derivative instruments.
Our results of operations are affected by the volatility of unrealized gains and losses and changes in fair value, which fluctuate with
changes in natural gas, crude oil and NGL prices. These fluctuations could be significant in a volatile pricing environment. See Note 5 to
the Condensed Consolidated Financial Statements for a further description of our price risk management activities.
48
The following table sets forth our commodity derivative positions as of December 31, 2011:
Average
Volume Per Weighted Average Price
Ceiling
Floor/Swap
Instrument
Day
(in MMBtu)
Natural Gas:
First quarter 2012
First quarter 2012
Second quarter 2012
Third quarter 2012
Fourth quarter 2012
Crude Oil:
First quarter 2012
Second quarter 2012
Third quarter 2012
Fourth quarter 2012
First quarter 2013
Second quarter 2013
Third quarter 2013
Fourth quarter 2013
First quarter 2012
Second quarter 2012
Third quarter 2012
Fourth quarter 2012
First quarter 2013
Second quarter 2013
Third quarter 2013
Fourth quarter 2013
Premiums - Deferred
Settlements to be paid in subsequent
period
Collars
Swaps
Swaps
Swaps
Swaps
Collars
Collars
Collars
Collars
Collars
Collars
Collars
Collars
Swaps
Swaps
Swaps
Swaps
Swaption
Swaption
Swaption
Swaption
20,000 $
10,000 $
20,000 $
20,000 $
10,000 $
(barrels)
1,000 $
1,000 $
1,000 $
1,000 $
1,000 $
1,000 $
1,000 $
1,000 $
1,400 $
1,000 $
500 $
500 $
1,100 $
1,000 $
900 $
750 $
Fair Value
Asset
Liability
($/MMBtu)
6.00 $
5.10
5.31
5.31
5.10
8.50 $
5,394 $
1,880
3,935
3,706
1,424
97.00
97.00
97.00
97.00
100.00
100.00
100.00
100.00
($/barrel)
90.00 $
90.00 $
90.00 $
90.00 $
90.00 $
90.00 $
90.00 $
90.00 $
101.16
100.61
100.00
100.00
100.00
100.00
100.00
100.00
-
-
-
-
-
-
-
29
261
106
52
88
-
-
-
-
-
162
-
-
-
-
-
361
447
412
350
146
80
14
-
-
-
-
-
1,049
849
674
497
3,570
-
The following table illustrates the estimated impact on the fair values of our derivative financial instruments and operating income
attributable to hypothetical changes in the underlying commodity prices. This illustration assumes that natural gas prices, crude oil prices
and production volumes remain constant at anticipated levels. The estimated changes in operating income exclude potential cash receipts
or payments in settling these derivative positions.
Effect on the fair value of natural gas derivatives
Effect on the fair value of crude oil derivatives
Effect on 2012 operating income, excluding natural gas derivatives
Effect on 2012 operating income, excluding crude oil derivatives
49
Change of $1.00 per MMBtu of Natural Gas
or $10.00 per Barrel of Crude Oil
($ in millions)
$
$
$
$
Increase
(6.3) $
(12.1) $
24.0 $
24.8 $
Decrease
6.5
10.7
(24.1)
(24.7)
Item 8 Financial Statements and Supplemental Data
PENN VIRGINIA CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Operations for the Years Ended December 31, 2011, 2010 and 2009
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2011, 2010 and 2009
Consolidated Balance Sheets as of December 31, 2011 and 2010
Consolidated Statements of Cash Flows for the Years Ended December 31, 2011, 2010 and 2009
Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2011, 2010 and 2009
Notes to the Consolidated Financial Statements:
1. Nature of Operations
2. Summary of Significant Accounting Policies
3. Acquisitions and Divestitures
4. Accounts Receivable and Major Customers
5. Derivative Instruments
6. Property and Equipment
7. Asset Retirement Obligations
8. Long-Term Debt
9. Income Taxes
10. Additional Balance Sheet Detail
11. Fair Value Measurements
12. Commitments and Contingencies
13. Shareholders’ Equity
14. Share-Based Compensation
15. Restructuring Activities
16. Impairments
17. Interest Expense
18. Earnings per Share
19. Discontinued Operations
Supplemental Quarterly Financial Information (unaudited)
Supplemental Information on Oil and Gas Producing Activities (unaudited)
50
Page
51
52
53
54
55
56
57
57
59
60
60
63
63
63
66
68
68
71
72
72
75
76
76
77
77
79
80
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Penn Virginia Corporation:
We have audited the accompanying consolidated balance sheets of Penn Virginia Corporation and subsidiaries as of December 31, 2011
and 2010, and the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for each of
the years in the three-year period ended December 31, 2011. We also have audited Penn Virginia Corporation’s internal control over
financial reporting as of December 31, 2011, based on criteria established in Internal Control – Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Penn Virginia Corporation’s management is responsible
for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the
effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control
Over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the
Company’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of
material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of
the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial
statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of
any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Penn
Virginia Corporation and subsidiaries as of December 31, 2011 and 2010, and the results of its operations and its cash flows for each of the
years in the three-year period ended December 31, 2011, in conformity with U.S. generally accepted accounting principles. Also in our
opinion, Penn Virginia Corporation maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2011, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
Houston, Texas
February 27, 2012
/s/ KPMG LLP
51
PENN VIRGINIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
Revenues
Natural gas
Crude oil
Natural gas liquids (NGLs)
Gain on sales of property and equipment
Other
Total revenues
Operating expenses
Lease operating
Gathering, processing and transportation
Production and ad valorem taxes
General and administrative
Exploration
Depreciation, depletion and amortization
Impairments
Other
Total operating expenses
Operating loss
Other income (expense)
Interest expense
Loss on extinguishment of debt
Derivatives
Other
Loss from continuing operations before income taxes
Income tax benefit
Loss from continuing operations
Income from discontinued operations, net of tax
Gain on sale of discontinued operations, net of tax
Net income (loss)
Less net income attributable to noncontrolling interests in discontinued operations
$
Year Ended December 31,
2010
2011
2009
137,070 $
119,582
43,394
3,570
2,389
306,005
36,988
15,157
13,690
48,328
78,943
162,534
104,688
1,096
461,424
171,141 $
53,532
26,663
648
2,454
254,438
35,757
14,180
13,917
58,383
49,641
134,700
45,959
709
353,246
169,666
43,258
15,735
2,372
4,175
235,206
44,392
11,307
15,044
49,690
57,754
154,351
106,415
1,599
440,552
(155,419)
(98,808)
(205,346)
(56,216)
(25,421)
15,651
335
(221,070)
88,155
(132,915)
-
-
(132,915)
-
(53,679)
-
41,906
2,403
(108,178)
42,851
(65,327)
33,448
51,546
19,667
(28,090)
(44,231)
-
31,568
1,259
(216,750)
85,894
(130,856)
53,488
-
(77,368)
(37,275)
Loss attributable to Penn Virginia Corporation
$
(132,915) $
(8,423) $
(114,643)
Loss per share attributable to Penn Virginia Corporation - Basic:
Continuing operations
Discontinued operations
Gain on sale of discontinued operations
Net loss
Loss per share attributable to Penn Virginia Corporation - Diluted:
Continuing operations
Discontinued operations
Gain on sale of discontinued operations
Net loss
Weighted average shares outstanding, basic
Weighted average shares outstanding, diluted
$
$
$
$
(2.90) $
-
-
(2.90) $
(2.90) $
-
-
(2.90) $
(1.44) $
0.12
1.13
(0.19) $
(1.44) $
0.12
1.13
(0.19) $
(2.99)
0.37
-
(2.62)
(2.99)
0.37
-
(2.62)
45,784
45,784
45,553
45,553
43,811
43,811
See accompanying notes to consolidated financial statements.
52
PENN VIRGINIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
Net income (loss)
Other comprehensive income (loss):
$
Unrealized gains (losses), net of tax of $62 in 2009
Hedging reclassification adjustments, net of tax of $1,986 in 2009
Total change in hedging derivative financial instruments
Change in pension and postretirement obligations, net of tax of ($79) in 2011, $188 in
2010 and $75 in 2009
Comprehensive income (loss)
Less amounts attributable to noncontrolling interests:
Net income
Other comprehensive income
Comprehensive loss attributable to Penn Virginia
Year Ended December 31,
2010
2009
2011
(132,915) $
-
-
-
(146)
(146)
(133,061)
19,667 $
(77,368)
-
582
582
348
930
20,597
115
3,689
3,804
140
3,944
(73,424)
-
-
(133,061) $
(28,090)
(582)
(8,075) $
(37,275)
(1,048)
(111,747)
$
See accompanying notes to consolidated financial statements.
53
PENN VIRGINIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
Assets
Current assets
Cash and cash equivalents
Accounts receivable, net of allowance for doubtful accounts
Derivative assets
Income taxes receivable
Other current assets
Total current assets
Property and equipment, net (successful efforts method)
Derivative assets
Other assets
Total assets
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable and accrued liabilities
Derivative liabilities
Deferred income taxes
Income taxes payable
Current portion of long-term debt
Total current liabilities
Other liabilities
Derivative liabilities
Deferred income taxes
Long-term debt
Commitments and contingencies (Note 12)
Shareholders’ equity:
Preferred stock of $100 par value – 100,000 shares authorized; none issued
Common stock of $0.01 par value – 128,000,000 shares authorized; shares issued of 45,714,191
and 45,556,854 as of December 31, 2011 and December 31, 2010, respectively
Paid-in capital
Retained earnings
Deferred compensation obligation
Accumulated other comprehensive loss
Treasury stock – 223,886 and 125,357 shares of common stock, at cost, as of
December 31, 2011 and December 31, 2010, respectively
Total shareholders’ equity
Total liabilities and shareholders’ equity
See accompanying notes to consolidated financial statements.
54
$
$
$
As of December 31,
2010
2011
7,512 $
72,432
18,987
31,465
14,950
145,346
1,777,575
-
20,132
1,943,053 $
120,911
72,378
16,818
-
4,233
214,340
1,705,584
3,889
20,787
1,944,600
94,504 $
3,549
3,808
-
4,746
106,607
15,887
6,850
274,839
692,561
99,661
388
4,318
2,627
-
106,994
19,958
-
330,836
506,536
-
-
270
690,131
157,242
3,620
(1,084)
267
680,981
300,473
2,743
(938)
(3,870)
846,309
1,943,053 $
(3,250)
980,276
1,944,600
$
PENN VIRGINIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities
Net loss
Adjustments to reconcile net loss to net cash provided by operating activities from
Year Ended December 31,
2010
2011
2009
$
(132,915) $
19,667 $
(77,368)
continuing operations:
Income from discontinued operations
Gain on sale of discontinued operations
Non-cash portion of loss on extinguishment of debt
Depreciation, depletion and amortization
Impairments
Derivative contracts:
Net gains
Cash settlements
Deferred income taxes (benefit)
Loss (gain) on sales of property and equipment, net
Dry hole and unproved leasehold expense
Non-cash interest expense
Share-based compensation
Other, net
Changes in operating assets and liabilities:
Accounts receivable, net
Accounts payable and accrued expenses
Other assets and liabilities
Net cash provided by operating activities from continuing operations
Cash flows from investing activities
Capital expenditures - property and equipment
Proceeds from the sale of PVG units, net (Note 3)
Proceeds from sales of property and equipment, net
Other, net
Net cash used in investing activities for continuing operations
Cash flows from financing activities
Dividends paid
Proceeds from revolving credit facility borrowings
Repayment of revolving credit facility borrowings
Proceeds from issuance of senior notes, net
Repurchase of Convertible Notes
Repayments of short-term borrowings
Debt issuance costs paid
Proceeds from the issuance of common stock, net
Proceeds from the sale of PVG units, net (Note 3)
Distributions received from discontinued operations
Other, net
Net cash provided by financing activities from continuing operations
Cash flows from discontinued operations
Net cash provided by operating activities
Net cash used in investing activities
Net cash used in provided by financing activities
Net cash provided by discontinued operations
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents - beginning of period
Cash and cash equivalents - end of period
Supplemental disclosures:
Cash paid for:
Interest (net of amounts capitalized)
Income taxes (net of refunds received)
-
-
22,456
162,534
104,688
(15,651)
27,380
(85,501)
(2,474)
60,940
6,807
7,430
275
(1,792)
(6,552)
(2,884)
144,741
(36,832)
(86,662)
-
134,700
45,959
(41,906)
32,818
42,528
61
36,275
11,984
7,811
(209)
(19,964)
10,877
(77,268)
79,839
(445,623)
-
39,368
100
(406,155)
(405,994)
139,120
25,567
1,192
(240,115)
(10,316)
114,000
(15,000)
300,000
(232,963)
-
(8,854)
-
-
-
1,148
148,015
-
-
-
-
(113,399)
120,911
7,512 $
(10,271)
-
-
-
-
-
-
-
199,125
11,218
2,098
202,170
77,759
(18,112)
(59,647)
-
41,894
79,017
120,911 $
(64,130)
-
-
154,351
106,415
(28,033)
58,147
(83,222)
(1,910)
33,278
10,202
9,127
683
33,266
(20,066)
(13,007)
117,733
(205,676)
-
15,083
11
(190,582)
(9,836)
87,000
(419,000)
291,009
-
(7,542)
(14,959)
64,835
118,080
42,279
-
151,866
158,214
(80,506)
(77,708)
-
79,017
-
79,017
44,589 $
210 $
43,531 $
28,184 $
34,640
9,443
$
$
$
See accompanying notes to consolidated financial statements.
55
PENN VIRGINIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(in thousands)
Common
Shares
Outstanding
Common
Stock
Paid-in
Capital
Retained
Earnings
Deferred
Compensation
Obligation
Accumulated
Other
Comprehensive
Loss
Treasury
Stock
Total
Penn Virginia
Shareholders'
Equity
Noncontrolling
Interests
Total
Shareholders'
Equity
Balance as of December 31, 2008
41,871
$
230
$
485,967
$
443,646
$
2,237
$
(4,182) $
(2,683) $
925,215
$
297,227
$
1,222,442
Net income (loss)
Change in hedging derivative
financial instruments
Change in pension and
postretirement obligations
Dividends paid ($0.225 per share)
Issuance of common stock
Common stock issued as
compensation
Share-based compensation
Deferred compensation
Exercise of stock options
Sale of subsidiary units, net of tax
(Notes 3, 13 and 19)
Unit-based compensation of
subsidiaries
Distributions to noncontrolling
interest holders
Other
Balance as of December 31, 2009
Net income (loss)
Change in hedging derivative
financial instruments
Change in pension and
postretirement obligations
Dividends paid ($0.225 per share)
Common stock issued as
compensation
Share-based compensation
Deferred compensation
Exercise of stock options
Restricted stock unit vesting
Sale of subsidiary units, net of tax
(Notes 3, 13 and 19)
Deconsolidation of subsidiaries
(Notes 3, 13 and 19)
Unit-based compensation of
subsidiaries
Distributions to noncontrolling
interest holders
Other
Balance as of December 31, 2010
Net loss
Change in pension and
postretirement obligations
Dividends paid ($0.225 per share)
Common stock issued as
compensation
Share-based compensation
Deferred compensation
Exercise of stock options
Restricted stock unit vesting
Other
Balance as of December 31, 2011
-
-
-
-
3,500
3
-
12
-
-
-
-
-
-
-
35
-
-
-
-
-
-
-
-
-
-
64,800
60
9,062
11
367
32,739
(833)
(114,643)
-
-
(9,836)
-
-
-
-
-
-
-
-
-
45,386
-
-
265
-
(1,327)
590,846
-
-
319,167
-
-
-
-
5
(2)
8
136
24
-
-
-
-
-
45,557
-
-
-
11
-
-
95
51
-
45,714
$
-
-
-
-
-
-
-
1
1
-
-
-
-
-
267
-
-
-
-
-
1
1
1
-
270
-
-
-
-
(8,423)
-
-
(10,271)
92
7,157
562
1,712
201
82,915
-
(1,267)
-
(1,237)
680,981
-
-
-
-
-
-
-
-
-
-
300,473
-
-
-
(132,915)
-
(10,316)
93
6,460
876
1,225
270
226
690,131
$
-
-
-
-
-
-
157,242
$
$
-
-
-
-
-
-
-
186
-
-
-
-
-
2,423
-
-
-
-
-
-
320
-
-
-
-
-
-
-
2,743
-
-
-
-
-
877
-
-
-
3,620
-
2,756
140
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(258)
(386)
-
-
-
-
(1,286)
(3,327)
-
-
348
-
-
-
-
-
-
-
-
-
-
-
(938)
-
(146)
-
-
-
-
-
-
-
(309)
386
-
-
-
-
-
-
(3,250)
-
-
-
(114,643)
37,275
(77,368)
2,756
1,048
3,804
140
(9,836)
64,835
60
9,062
(61)
(19)
-
-
-
-
-
-
-
140
(9,836)
64,835
60
9,062
(61)
(19)
32,739
67,713
100,452
(833)
4,819
3,986
-
(1,327)
908,088
(78,171)
-
329,911
(78,171)
(1,327)
1,237,999
(8,423)
28,090
19,667
-
582
582
348
(10,271)
92
7,157
573
2,099
202
-
-
-
-
-
-
-
348
(10,271)
92
7,157
573
2,099
202
82,915
70,188
153,103
-
(382,325)
(382,325)
(1,267)
3,120
1,853
-
(49,566)
(1,237)
980,276
(132,915)
(146)
(10,316)
-
-
-
-
-
-
-
-
-
-
-
-
$
(49,566)
(1,237)
980,276
(132,915)
(146)
(10,316)
93
6,460
1,134
1,226
271
226
846,309
-
-
-
-
-
-
(1,084) $
-
-
(620)
-
-
-
(3,870) $
93
6,460
1,134
1,226
271
226
846,309
$
$
See accompanying notes to consolidated financial statements.
56
PENN VIRGINIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
1. Nature of Operations
Penn Virginia Corporation (“Penn Virginia,” the “Company,” “we,” “us” or “our”) is an independent oil and gas company primarily
engaged in the exploration, development and production of natural gas and oil in various domestic onshore regions including Texas,
Appalachia, the Mid-Continent and Mississippi.
2. Summary of Significant Accounting Policies
Principles of Consolidation
Our Consolidated Financial Statements include the accounts of Penn Virginia and all of its subsidiaries. Intercompany balances and
transactions have been eliminated.
Use of Estimates
Preparation of our Consolidated Financial Statements in conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities in our
Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Cash and Cash Equivalents
We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Derivative Instruments
From time to time, we utilize derivative instruments to mitigate our financial exposure to interest rates and natural gas and crude oil
price volatility. The derivative instruments, which are placed with financial institutions that we believe are acceptable credit risks, take the
form of collars, swaps and swaptions. All derivative transactions are subject to our risk management policy, which has been reviewed and
approved by our board of directors.
All derivative instruments are recognized in the Consolidated Financial Statements at fair value . The fair values of our derivative
instruments are determined based on discounted cash flows derived from quoted forward prices. Our derivative instruments are not
formally designated as hedges. We recognize changes in fair value in earnings currently as a component of the Derivatives caption on the
Consolidated Statements of Operations. We have experienced and could continue to experience significant changes in the amount of
unrealized derivative gains or losses recognized due to fluctuations in the value of these commodity derivative contracts, which fluctuate
with changes in natural gas and crude oil prices.
Oil and Gas Properties
We use the successful efforts method to account for our oil and gas properties. Under this method, costs of acquiring properties, costs
of drilling successful exploration wells and development costs are capitalized. Geological and geophysical costs, delay rentals and costs to
drill exploratory wells that do not find proved reserves are expensed as oil and gas exploration. We will carry the costs of an exploratory
well as an asset if the well has found a sufficient quantity of reserves to justify its completion as a producing well and as long as we are
making sufficient progress assessing the reserves and the economic and operating viability of the project. For certain projects, it may take
us more than one year to evaluate the future potential of the exploratory well and make a determination of its economic viability. Our
ability to move forward on a project may be dependent on gaining access to transportation or processing facilities or obtaining permits and
government or partner approval, the timing of which is beyond our control. In such cases, exploratory well costs remain suspended as long
as we are actively pursuing access to necessary facilities and access to such permits and approvals and believe that they will be obtained.
We assess the status of suspended exploratory well costs on a quarterly basis.
Depreciation, depletion and amortization (“DD&A”) of proved producing properties is computed using the units-of-production
method. Oil and natural gas liquids (“NGLs”) are converted to a gas equivalent on the basis that one barrel of liquids is equivalent to six
thousand cubic feet of natural gas. Historically, we have adjusted our depletion rate throughout the year as new data becomes available and
in the fourth quarter based on the year-end reserve report.
Impairment of Long-Lived and Other Assets
We review assets for impairment when events or circumstances indicate a possible decline in the recoverability of the carrying value
of such property. If the carrying value of the asset is determined to be impaired, we reduce the asset to its fair value. Fair value may be
estimated using comparable market data, a discounted cash flow method, or a combination of the two. In the discounted cash flow method,
estimated future cash flows are based on management’s expectations for the future and could include estimates of future production,
commodity prices based on published forward commodity price curves as of the date of the estimate, operating and development costs, and
a risk-adjusted discount rate.
57
We review oil and gas properties for impairment periodically when events and circumstances indicate a decline in the recoverability
of the carrying value of such properties, such as a downward revision of the reserve estimates or lower commodity prices. We estimate the
future cash flows expected in connection with the properties and compare such future cash flows to the carrying amounts of the properties
to determine if the carrying amounts are recoverable. Performing the impairment evaluations requires use of judgments and estimates since
the results are dependent on future events. Such events include estimates of proved and possible reserves, future commodity prices and the
timing of future production and capital expenditures, among others. We have recognized impairments of our properties in 2011, 2010 and
2009, as described in Note 16. We cannot predict whether impairment charges will be required in the future.
The costs of unproved leaseholds, including associated interest costs for the period activities were in progress to bring projects to their
intended use, are capitalized pending the results of exploration efforts. Unproved properties whose acquisition costs are insignificant to
total oil and gas properties are amortized in the aggregate over the lesser of five years or the average remaining lease term and the
amortization is charged to exploration expense. We assess unproved properties whose acquisition costs are relatively significant, if any, for
impairment on a property-by-property basis. As exploration work progresses and the reserves on properties are proven, capitalized costs of
these properties are subject to depreciation and depletion. If the exploration work is unsuccessful, the capitalized costs of the properties
related to the unsuccessful work is charged to exploration expense. The timing of any write-downs of any significant unproved properties
depends upon the nature, timing and extent of future exploration and development activities and their results.
Other Property and Equipment
Other property and equipment consists primarily of gathering systems and related support equipment. Property and equipment are
carried at cost and include expenditures for additions and improvements, such as roads and land improvements, which increase the
productive lives of existing assets. Maintenance and repair costs are charged to expense as incurred. Renewals and betterments, which
extend the useful life of the properties, are capitalized.
We compute depreciation and amortization of property and equipment using the straight-line balance method over the estimated
useful life of each asset as follows:
Gathering systems
Other property and equipment
Asset Retirement Obligations
Useful Life
15-20 years
3-20 years
We recognize the fair value of a liability for an asset retirement obligation (“ARO”) in the period in which it is incurred. Associated
asset retirement costs are capitalized as part of the carrying cost of the asset. Our AROs relate to the plugging and abandonment of oil and
natural gas wells and the associated asset is recorded as a component of oil and gas properties. After recording these amounts, the ARO is
accreted to its future estimated value, and the additional capitalized costs are depreciated over the productive life of the assets. Both the
accretion of the ARO and the depreciation of the related long-lived assets are included in DD&A expense on our Consolidated Statements
of Operations.
Income Taxes
We recognize deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized in the
Company’s financial statements or tax returns. Using this method, deferred tax liabilities and assets are determined based on the difference
between the financial statement carrying amounts and tax bases of assets and liabilities using enacted tax rates. In assessing our deferred
tax assets, we consider whether a valuation allowance should be recorded for some or all of the deferred tax assets which may not be
realized. The ultimate realization of deferred tax assets is assessed periodically and is dependent upon the generation of future taxable
income and our ability to utilize tax credits and operating loss carryforwards during the periods in which the temporary differences become
deductible. We also consider the scheduled reversal of deferred tax liabilities and available tax planning strategies. We recognize interest
attributable to income taxes, to the extent they arise, as a component of interest expense and penalties as a component of income tax
expense.
Due to the geographical scope of our operations, we are subject to ongoing tax examinations in numerous domestic jurisdictions.
Accordingly, we may record incremental tax expense based upon the more-likely-than-not outcomes of uncertain tax positions. In addition,
when applicable, we adjust the previously recorded tax expense to reflect examination results when the position is effectively settled. Our
ongoing assessments of the more-likely-than-not outcomes of the examinations and related tax positions require judgment and can increase
or decrease our effective tax rate, as well as impact our operating results. The specific timing of when the resolution of each tax position
will be reached is uncertain.
58
Revenue Recognition
We record revenues associated with sales of natural gas, crude oil, condensate and NGLs when title passes to the customer. We
recognize natural gas sales revenues from properties in which we have an interest with other producers on the basis of our net revenue
interest (“entitlement” method of accounting). Natural gas imbalances occur when we sell more or less than our entitled ownership
percentage of natural gas production. We treat any amount received in excess of our share as a liability. If we take less than we are entitled
to take, we record the under-delivery as a receivable. As a result of the numerous requirements necessary to gather information from
purchasers or various measurement locations, calculate volumes produced, perform field and wellhead allocations and distribute and
disburse funds to various working interest partners and royalty owners, the collection of revenues from oil and gas production may take up
to 60 days following the month of production. Therefore, we make accruals for revenues and accounts receivable based on estimates of our
share of production, particularly from properties that are operated by our partners. We record any differences, which historically have not
been significant, between the actual amounts ultimately received and the original estimates in the period they become finalized.
Share-Based Compensation
We have stock compensation plans that allow incentive and nonqualified stock options, restricted stock and restricted stock units to
be granted to key employees and officers and nonqualified stock options and deferred common stock units to be granted to directors. We
measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the
award.
Recent Accounting Standards
During 2011, no new accounting standards were adopted or were pending adoption that would have a significant impact on our
Consolidated Financial Statements and Notes to the Consolidated Financial Statements.
Reclassifications
Certain amounts for the 2010 and 2009 periods have been reclassified to conform to the current year presentation.
Subsequent Events
Management has evaluated all activities of the Company, through the date upon which the Consolidated Financial Statements were
issued, and concluded that no subsequent events have occurred that would require recognition in the Consolidated Financial Statements or
disclosure in the Notes to the Consolidated Financial Statements.
3. Acquisitions and Divestitures
In the following paragraphs, all references to crude oil and natural gas reserves and acreage acquired are unaudited. The factors we
used to determine the fair market value of acquisitions include, but are not limited to, discounted future net cash flows on a risk-adjusted
basis, comparable market data, geographic location, quality of resources and potential marketability.
Property Acquisitions
Eagle Ford and Marcellus Shale Property Acquisitions
During 2011, we acquired approximately 7,300 net Eagle Ford Shale acres in Gonzales County, Texas for approximately $27 million.
The acreage acquired in these transactions is in close proximity to our initial 2010 Eagle Ford Shale acquisitions which was approximately
6,800 net acres for $31.1 million. We are the operator of all of the combined Gonzales County acreage with an average working interest of
approximately 81%.
In December 2011, we entered into an agreement with a major oil and gas company to jointly explore approximately 13,000 gross
acres of the Eagle Ford Shale in Lavaca County, Texas. The agreement establishes an area of mutual interest near our existing acreage in
Gonzales County. Depending upon the future participation of other companies, our minimum working interest will be approximately 50%.
Under the terms of the agreement, we must drill six wells by September 1, 2012 to earn our interest in the acreage. We will carry our
counterparty on its working interest in the first three wells.
During 2010, we acquired a total of approximately 27,000 net acres in the Marcellus Shale play in Pennsylvania for approximately
$69 million.
Divestitures
Oil and Gas Properties
In August 2011, we sold a substantial portion of our Arkoma Basin assets for approximately $30 million, excluding transaction costs
and subject to customary purchase and sale adjustments. Upon the final settlement, we recognized an insignificant loss in connection with
the transaction, following an impairment of approximately $71 million in the second quarter of 2011. The sale, which was effective July 1,
2011, included primarily natural gas and coal bed methane properties comprising approximately 73,000 net acres in Oklahoma and Texas
with proved reserves of approximately 37.1 billion cubic feet of natural gas equivalent as well as related inventory and equipment.
59
In December 2011, we sold approximately 2,700 net undeveloped acres in Butler and Armstrong counties in Pennsylvania for
proceeds of $8.1 million, net of transaction costs. We recognized a gain of $3.3 million in connection with this transaction. During 2011,
we also received net proceeds of $1.2 million from the sale of various oil and gas assets in New York, Oklahoma, Pennsylvania and Texas.
In January 2010, we completed the sale of all of our oil and gas properties in the Gulf Coast region (southern Texas and Louisiana)
for cash proceeds of $23.4 million, net of transaction costs and certain purchase and sale adjustments, and the receipt of certain oil and gas
properties located in the Gwinville field in northern Mississippi valued at $8.2 million. During 2010, we also received net proceeds of $2.0
million from the sale of various oil and gas properties located in North Dakota, West Virginia and Oklahoma.
Penn Virginia GP Holdings, L.P. (“PVG”) Unit Offerings
In September 2009, we sold 10 million common units of PVG (“PVG Common Units”) owned by us for proceeds of $118.1 million,
net of offering costs, resulting in a reduction of our limited partner interest in PVG from 77.0% to 51.4%. In April 2010, we completed the
sale of an additional 11.25 million PVG Common Units for proceeds of $199.1 million, net of offering costs, which further reduced our
limited partner interest to 22.6%. On a combined basis, these transactions resulted in a $137.9 million increase to noncontrolling interests as
well as a $115.7 million increase to additional paid-in capital, net of income tax effects. Because we maintained a controlling financial
interest in PVG, the proceeds received from these transactions were reported as cash flows from financing activities on our Consolidated
Statements of Cash Flows.
In June 2010, we completed the sale of our remaining PVG Common Units for $139.1 million, net of offering costs. Immediately
prior to the closing of the June offering, we contributed 100% of the membership interests in PVG’s general partner to PVG, thereby
relinquishing control of PVG. As a result of this divestiture, we recognized a gain of $51.5 million, net of income tax effects of $35.1
million, which is reported in the “Gain on sale of discontinued operations, net of tax” caption on our Consolidated Statements of
Operations. Because we no longer held any interests in PVG, the proceeds received from this transaction were reported as cash flows from
investing activities on our Consolidated Statements of Cash Flows and we deconsolidated PVG from our Consolidated Financial
Statements. We have reported PVG’s results of operations and cash flows as discontinued operations for the 2010 and 2009 periods.
Additional information with respect to discontinued operations is provided in Note 19.
4. Accounts Receivable and Major Customers
The following table summarizes our accounts receivable by type as of the dates presented:
Customers
Joint interest partners
Other
Less: Allowance for doubtful accounts
As of December 31,
2010
2011
49,763 $
22,755
1,695
74,213
(1,781)
72,432 $
44,783
23,526
4,442
72,751
(373)
72,378
$
$
For the years ended December 31, 2011 and 2010, five customers accounted for $173.1 million and $140.2 million, or approximately
58% and 56%, respectively, of our total consolidated product revenues. As of December 31, 2011 and 2010, $31.6 million and $31.1
million, or approximately 44% and 43%, respectively, of our consolidated accounts receivable, including joint interest billings, related to
these customers. No significant uncertainties exist related to the collectability of amounts owed to us by these customers.
5. Derivative Instruments
We utilize derivative instruments to mitigate our financial exposure to natural gas and crude oil price volatility as well as the
volatility in interest rates attributable to our debt instruments. The derivative instruments, which are placed with financial institutions that
we believe are acceptable credit risks, generally take the form of collars, swaps and swaptions. Our derivative instruments are not
designated as hedges.
Commodity Derivatives
We utilize collars, swaps and swaptions to hedge against the variability in cash flows associated with anticipated sales of our future
oil and gas production. While the use of derivative instruments limits the risk of adverse price movements, such use may also limit future
revenues from favorable price movements.
The counterparty to a collar or swap contract is required to make a payment to us if the settlement price for any settlement period is
below the floor or swap price for such contract. We are required to make a payment to the counterparty if the settlement price for any
settlement period is above the ceiling or swap price for such contract. Neither party is required to make a payment to the other party if the
settlement price for any settlement period is equal to or greater than the floor price and equal to or less than the ceiling price for such
contract. A swaption contract gives our counterparties the option to enter into a fixed price swap with us at a future date. If the forward
commodity price for the term of the swaption is higher than or equal to the swaption strike price on the exercise date, the counterparty will
exercise its option to enter into a fixed price swap at the swaption strike price for the term of the swaption, at which point the contract
functions as a fixed price swap. If the forward commodity price for the term of the swaption is lower than the swaption strike price on the
exercise date, the option expires and no fixed price swap is in effect.
60
We determine the fair values of our commodity derivative instruments based on discounted cash flows derived from third-party
quoted forward prices for NYMEX Henry Hub gas and West Texas Intermediate crude oil closing prices as of the end of the reporting
period. The discounted cash flows utilize discount rates adjusted for the credit risk of our counterparties if the derivative is in an asset
position, and our own credit risk if the derivative is in a liability position.
The following table sets forth our commodity derivative positions as of December 31, 2011:
Average
Volume Per Weighted Average Price
Ceiling
Floor/Swap
Instrument
Day
(in MMBtu)
Natural Gas:
First quarter 2012
First quarter 2012
Second quarter 2012
Third quarter 2012
Fourth quarter 2012
Crude Oil:
First quarter 2012
Second quarter 2012
Third quarter 2012
Fourth quarter 2012
First quarter 2013
Second quarter 2013
Third quarter 2013
Fourth quarter 2013
First quarter 2012
Second quarter 2012
Third quarter 2012
Fourth quarter 2012
First quarter 2013
Second quarter 2013
Third quarter 2013
Fourth quarter 2013
Premiums – Deferred 1
Settlements to be paid in subsequent
period
Collars
Swaps
Swaps
Swaps
Swaps
Collars
Collars
Collars
Collars
Collars
Collars
Collars
Collars
Swaps
Swaps
Swaps
Swaps
Swaption
Swaption
Swaption
Swaption
20,000 $
10,000 $
20,000 $
20,000 $
10,000 $
(barrels)
1,000 $
1,000 $
1,000 $
1,000 $
1,000 $
1,000 $
1,000 $
1,000 $
1,400 $
1,000 $
500 $
500 $
1,100 $
1,000 $
900 $
8.50
97.00
97.00
97.00
97.00
100.00
100.00
100.00
100.00
($/MMBtu)
6.00 $
5.10
5.31
5.31
5.10
($/barrel)
90.00 $
90.00 $
90.00 $
90.00 $
90.00 $
90.00 $
90.00 $
90.00 $
101.16
100.61
100.00
100.00
100.00
100.00
100.00
750 $
100.00
Fair Value
Asset
Liability
5,394
1,880
3,935
3,706
1,424
-
-
-
-
-
-
-
29
261
106
52
88
-
-
-
-
-
-
-
-
-
-
361
447
412
350
146
80
14
-
-
-
-
-
1,049
849
674
497
3,570
162
-
1 Premiums are attributable to the crude oil collars for 2013 and are included in noncurrent derivative liabilities.
Interest Rate Swaps
In December 2009, we entered into an interest rate swap agreement to establish variable rates on approximately one-third of the face
amount of the outstanding obligation under the 10.375% Senior Notes due 2016 (“2016 Senior Notes”). During August 2011, we
terminated this agreement and received $2.9 million in cash proceeds.
The following table sets forth the terms and positions of our interest rate swaps as of the periods presented:
Through June 2013
Term
Notional
Amount
$
Swap Interest Rates 1
Pay
Receive
Fair Value as of December 31,
2011
2010
100,000 LIBOR + 8.175%
10.375% $
- $
2,590
1 References to LIBOR represent the 3-month rate.
61
Financial Statement Impact of Derivatives
The impact of our derivatives activities on income is included in the Derivatives caption on our Consolidated Statements of
Operations. The following table summarizes the effects of our derivative activities, for the periods presented:
Impact by contract type:
Commodity contracts
Interest rate contracts
Realized and unrealized impact:
Cash received (paid) for:
Commodity contract settlements
Interest rate contract settlements
Unrealized gains (losses) attributable to:
Commodity contracts
Interest rate contracts
Year Ended December 31,
2010
2011
2009
14,422 $
1,229
15,651 $
36,693 $
5,213
41,906 $
33,218
(1,650)
31,568
23,562 $
3,818
27,380
(9,140)
(2,589)
(11,729)
15,651 $
33,480 $
(662)
32,818
3,213
5,875
9,088
41,906 $
59,908
(1,761)
58,147
(26,690)
111
(26,579)
31,568
$
$
$
$
The effects of derivative gains (losses) and cash settlements of our commodity and interest rate derivatives are reported as
adjustments to reconcile net income (loss) to net cash provided by operating activities from continuing operations. These items are recorded
in the “Derivative contracts: Net gains” and “Derivative contracts: Cash settlements” captions on our Consolidated Statements of Cash
Flows.
The following table summarizes the fair value of our derivative instruments, as well as the locations of these instruments, on our
Consolidated Balance Sheets as of the dates presented:
Type
Balance Sheet Location
Fair Values as of
December 31, 2011
December 31, 2010
Derivative
Assets
Derivative Derivative
Liabilities
Assets
Derivative
Liabilities
Commodity contracts
Interest rate contracts
Derivative assets/liabilities - current
Derivative assets/liabilities - current
$
Commodity contracts
Interest rate contracts
Derivative assets/liabilities - noncurrent
Derivative assets/liabilities - noncurrent
$
18,987 $
-
18,987
-
-
-
18,987 $
3,549 $
-
3,549
6,850
-
6,850
10,399 $
15,075 $
1,743
16,818
3,042
847
3,889
20,707 $
388
-
388
-
-
-
388
As of December 31, 2011, we reported a commodity derivative asset of $19.0 million. The contracts associated with this position are
with six counterparties, all of which are investment grade financial institutions, and are substantially concentrated with three of those
counterparties. This concentration may impact our overall credit risk, either positively or negatively, in that these counterparties may be
similarly affected by changes in economic or other conditions. We neither paid nor received collateral with respect to our derivative
positions. No significant uncertainties exist related to the collectability of amounts that may be owed to us by these counterparties.
62
6.
Property and Equipment
The following table summarizes our property and equipment as of the dates presented:
Oil and gas properties:
Proved
Unproved
Total oil and gas properties
Other property and equipment
Total property and equipment
Accumulated depreciation, depletion and amortization
As of December 31,
2010
2011
$
$
2,239,186 $
120,288
2,359,474
143,285
2,502,759
(725,184)
1,777,575 $
2,021,729
171,303
2,193,032
133,754
2,326,786
(621,202)
1,705,584
The following table describes the changes in capitalized exploratory drilling costs that are pending the determination of proved
reserves for the periods presented:
Number
of Wells
2011
1 $
-
-
(1)
- $
Cost
Number
of Wells
6,180
-
-
(6,180)
-
2010
- $
1
-
-
1 $
Cost
Number
of Wells
-
6,180
-
-
6,180
2009
1 $
-
(1)
-
- $
Cost
2,482
-
(2,482)
-
-
Balance at beginning of year
Additions pending determination of proved
reserves
Reclassification to wells, equipment and
facilities based on the determination of
proved reserves
Charged to exploration expense
Balance at end of year
7.
Asset Retirement Obligations
The following table reconciles our AROs for the periods presented, which are included in the Other liabilities caption on our
Consolidated Balance Sheets:
Balance at beginning of year
Liabilities incurred
Liabilities settled
Sale of properties
Accretion expense
Balance at end of year
8.
Long-Term Debt
The following table summarizes our long-term debt as of the dates presented:
Revolving credit facility
Senior notes due 2016, net of discount (principal amount of $300,000)
Senior notes due 2019
Convertible notes due 2012, net of discount (principal amount of $4,915 and $230,000)
Less: Current portion of long-term debt
63
As of December 31,
2010
2011
7,364 $
214
(183)
(1,611)
499
6,283 $
6,835
126
(41)
-
444
7,364
As of December 31,
2010
2011
99,000 $
293,561
300,000
4,746
697,307
(4,746)
692,561 $
-
292,487
-
214,049
506,536
-
506,536
$
$
$
$
Revolving Credit Facility
In August 2011, we entered into a new five-year revolving credit facility (the “Revolver”) maturing in August 2016. The Revolver
provides for a $300 million revolving commitment, including a $20 million sublimit for the issuance of letters of credit. The Revolver has a
borrowing base of $380 million. The borrowing base is redetermined semi-annually. There is an accordion feature that allows us to increase
the commitment up to the lower of the borrowing base or $600 million upon receiving additional commitments from one or more lenders.
The Revolver is available to us for general purposes including working capital, capital expenditures and acquisitions. We have letters of
credit of $1.4 million outstanding as of December 31, 2011. As of December 31, 2011, our available borrowing capacity under the
Revolver, as reduced by outstanding borrowings and such letters of credit, was $199.6 million.
Borrowings under the Revolver bear interest, at our option, at either (i) a rate derived from the London Interbank Offered Rate, as
adjusted for statutory reserve requirements for Eurocurrency liabilities (the “Adjusted LIBOR”), plus an applicable margin ranging from
1.500% to 2.500% or (ii) the greater of (a) the prime rate, (b) the federal funds effective rate plus 0.5% or (c) the one-month Adjusted
LIBOR plus 1.0%, and, in each case, plus an applicable margin (ranging from 0.500% to 1.500%). The applicable margin is determined
based on the ratio of our outstanding borrowings to the available Revolver capacity. Commitment fees are charged at 0.375% increasing to
0.500% on the undrawn portion of the Revolver as determined by our ratio of outstanding borrowings to the available Revolver capacity.
As of December 31, 2011, the effective interest rate on the borrowings under the Revolver was 2.0625%.
The Revolver includes both current ratio and leverage ratio financial covenants. The current ratio is defined in the Revolver to
include, among other things, adjustments for undrawn availability and may not be less than 1.0 to 1.0. The ratio of total net debt to
EBITDAX, a non-GAAP financial measure defined in the Revolver, may not exceed 4.5 to 1.0 reducing to 4.0 to 1.0 for periods ending
after June 30, 2013.
The Revolver is guaranteed by Penn Virginia and all of our material subsidiaries (“Guarantor Subsidiaries”). The obligations under
the Revolver are secured by a first priority lien on substantially all of our proved oil and gas reserves and a pledge of the equity interests in
the Guarantor Subsidiaries.
The guarantees provided by the Guarantor Subsidiaries under the Revolver as well as those provided for the senior indebtedness
described below are full and unconditional and joint and several. Substantially all of our consolidated assets are held by the Guarantor
Subsidiaries. The parent company and its non-guarantor subsidiaries have no material independent assets or operations. There are no
significant restrictions on the ability of the parent company or any of the Guarantor Subsidiaries to obtain funds through dividends or other
means, including advances and intercompany notes, among others.
2016 Senior Notes
The 2016 Senior Notes were originally sold at 97% of par equating to an effective yield to maturity of approximately 11%. The 2016
Senior Notes bear interest at an annual rate of 10.375% payable on June 15 and December 15 of each year. Beginning in June 2013, we
may redeem all or part of the 2016 Senior Notes at a redemption price beginning at 105.188% of the principal amount and reducing to
100% in June 2015 and thereafter. The 2016 Senior Notes are senior to our existing and future subordinated indebtedness and are
effectively subordinated to all of our secured indebtedness, including the Revolver, to the extent of the collateral securing that
indebtedness. The obligations under the 2016 Senior Notes are fully and unconditionally guaranteed by the Guarantor Subsidiaries.
2019 Senior Notes
The Senior Notes due 2019 (“2019 Senior Notes”), which were issued at par in April 2011, bear interest at an annual rate of 7.25%
payable on April 15 and October 15 of each year. Beginning in April 2015, we may redeem all or part of the 2019 Senior Notes at a
redemption price beginning at 103.625% of the principal amount and reducing to 100% in June 2017 and thereafter. The 2019 Senior Notes
are senior to our existing and future subordinated indebtedness and are effectively subordinated to all of our secured indebtedness,
including the Revolver, to the extent of the collateral securing that indebtedness. The obligations under the 2019 Senior Notes are fully and
unconditionally guaranteed by the Guarantor Subsidiaries.
Convertible Notes
The 4.50% Convertible Senior Subordinated Notes due 2012 (“Convertible Notes”) bear interest at an annual rate of 4.50% payable
on May 15 and November 15 of each year. The Convertible Notes are convertible into cash up to the principal amount thereof and shares
of our common stock, if any, in respect of the excess conversion value, based on an initial conversion rate of 17.3160 shares of common
stock per $1,000 principal amount of the Convertible Notes (which is equal to an initial conversion price of approximately $57.75 per share
of common stock), subject to adjustment. The Convertible Notes are unsecured senior subordinated obligations, ranking junior in right of
payment to any of our senior indebtedness and to any of our secured indebtedness to the extent of the value of the assets securing such
indebtedness and equal in right of payment to any of our future unsecured senior subordinated indebtedness. The Convertible Notes rank
senior in right of payment to any of our future junior subordinated indebtedness and structurally rank junior to all existing and future
indebtedness of our Guarantor Subsidiaries.
64
The Convertible Notes are represented by a liability component which is included in long-term debt, net of discount, and an equity
component representing the convertible feature which is included in additional paid-in capital in shareholders’ equity. The effective interest
rate on the liability component of the Convertible Notes for all periods presented was 8.5%.
In connection with a tender offer completed in April 2011, the Company repurchased $225.1 million aggregate principal amount of
the Convertible Notes for $233.0 million, representing a premium of $35 per $1,000 principal amount. The tender offer resulted in the
extinguishment of approximately 98% of the outstanding Convertible Notes. The tender offer was funded with the net proceeds of the 2019
Senior Notes.
As a result of the tender offer, we recognized a pre-tax loss on extinguishment of debt of $25.9 million during the three months ended
June 30, 2011, of which $24.2 million was charged to earnings and the remaining $1.7 million was charged directly to shareholders’
equity. The loss charged to earnings was determined as follows:
Cash paid to repurchase principal:
Allocated to liability component
Allocated to equity component
Carrying value of liability component tendered:
Principal amount of Convertible Notes tendered
Pro rata share of original issue discount
Loss on extinguishment of debt:
Excess of liability component over carrying value
Write-off of pro rata share of debt issuance costs
Non-cash portion of loss on extinguishment
Transaction costs and fees paid
Pre-tax loss on extinguishment
The following table summarizes the carrying amount of these components as of the dates presented:
Principal
Unamortized discount
Net carrying amount of liability component
Carrying amount of equity component
$
$
$
$
$
$
231,331
1,632
232,963
225,085
(13,429)
211,656
19,675
2,147
21,822
2,416
24,238
As of December 31,
2010
2011
4,915 $
(169)
4,746 $
230,000
(15,951)
214,049
35,201 $
36,850
$
$
$
The following table summarizes the amounts recognized as components of interest expense attributable to the Convertible Notes for
the periods presented:
Contractual interest expense
Accretion on original issue discount
Amortization of debt issuance costs
Year Ended December 31,
2010
2011
2009
$
$
3,119 $
2,353
403
5,875 $
10,350 $
7,371
1,242
18,963 $
10,350
6,782
1,387
18,519
In connection with the original sale of the Convertible Notes, we entered into convertible note hedge transactions (“Note Hedges”)
with respect to shares of our common stock with affiliates of certain of the underwriters of the Convertible Notes (collectively, the “Option
Counterparties”). The Note Hedges cover, subject to anti-dilution adjustments, the net shares of our common stock that would be
deliverable to converting noteholders in the event of a conversion of the Convertible Notes.
We also entered into separate warrant transactions (“Warrants”), whereby we sold to the Option Counterparties warrants to acquire,
subject to anti-dilution adjustments, approximately 3,982,680 shares of our common stock at an exercise price of $74.25 per share.
65
In August 2011, we entered into a partial unwind transaction with one of the Option Counterparties in which we received cash
proceeds of less than $0.1 million. The transaction resulted in a reduction of the number of options outstanding attributable to the Note
Hedges as well as a reduction in the number of outstanding Warrants. The effect of this transaction resulted in an increase to additional
paid-in capital.
Debt Maturities
The following table sets forth the aggregate maturities of the principal amounts of our long-term debt for the next five years and
thereafter:
Year
2012
2013
2014
2015
2016
Thereafter
Total
9.
Income Taxes
Amounts
$
4,746
-
-
-
392,561
300,000
697,307
$
The following table summarizes our provision for income taxes from continuing operations for the periods presented:
Current income taxes (benefit)
Federal
State
Deferred income taxes (benefit)
Federal
State
Year Ended December 31,
2010
2011
2009
1,279 $
(3,933)
(2,654)
(109,240) $
876
(108,364)
(2,158)
(514)
(2,672)
(80,529)
(4,972)
(85,501)
(88,155) $
67,999
(2,486)
65,513
(42,851) $
(68,488)
(14,734)
(83,222)
(85,894)
$
$
The following table summarizes the intra-period allocation of income taxes for the periods presented:
Continuing operations
Discontinued operations
Gain on sale of discontinued operations
Year Ended December 31,
2010
2011
2009
$
$
(88,155) $
-
-
(88,155) $
(42,851) $
3,384
35,116
(4,351) $
(85,894)
10,642
-
(75,252)
The following table reconciles the difference between the income taxes computed by applying the statutory tax rate to income from
continuing operations before income taxes and our reported income tax expense for the periods presented:
Computed at federal statutory rate
State income taxes, net of federal
income tax benefit
Other, net
2011
(77,374)
(4,825)
(5,956)
(88,155)
$
$
Year Ended December 31,
2010
(37,862)
(35.0)% $
2009
(75,863)
(1,927)
(3,062)
(42,851)
(1.8)%
(2.8)%
(39.6)% $
(8,020)
(2,011)
(85,894)
(35.0)%
(3.7)%
(0.9)%
(39.6)%
(35.0)% $
(2.2)%
(2.7)%
(39.9)% $
66
The following table summarizes the principal components of our net deferred income tax liability as of the dates presented:
Deferred tax liabilities:
Property and equipment
Fair value of derivative instruments
Convertible notes
Total deferred tax liabilities
Deferred tax assets:
Pension and postretirement benefits
Share-based compensation
Net operating loss carryforwards
Other
Less: Valuation allowance
Total deferred tax assets
Net deferred tax liability
As of December 31,
2010
2011
$
429,568 $
3,006
60
432,634
352,431
2,215
6,143
360,789
3,046
8,838
150,953
10,642
173,479
(19,492)
153,987
278,647 $
3,951
7,602
27,915
5,230
44,698
(19,063)
25,635
335,154
$
As shown in the table above, the Company has recognized $154.0 million of deferred tax assets as of December 31, 2011. Included in
this total is a federal net operating loss carryforward of approximately $124 million, which expires in 2031, and state net operating loss
carryforwards of approximately $27 million, which expire between 2024 and 2031. As of December 31, 2011 and 2010, valuation
allowances of $19.5 million and $19.1 million, respectively, had been recorded for deferred tax assets associated with state net operating
loss carryforwards that were not more-likely-than-not to be realized.
During 2011, the Company generated a net operating loss for federal income tax purposes. The net operating loss is expected to be
carried back and applied against the taxable income of prior years. As of December 31, 2011, the Company classified $31.2 million of
deferred tax assets as a current income tax receivable attributable to the federal net operating loss expected to be utilized in 2012.
The Company has no liability for unrecognized tax benefits as of December 31, 2011 and 2010. There were no interest and penalty
charges recognized during the years ended December 31, 2011 and 2010. For the year ended December 31, 2009 we recognized $2.1
million in interest and penalties. Tax years from 2008 forward remain open for examination by the Internal Revenue Service and various
state jurisdictions.
67
10. Additional Balance Sheet Detail
The following table summarizes components of selected balance sheet accounts as of the dates presented:
Other current assets:
Tubular inventory and well materials
Prepaid expenses
Other assets:
Debt issuance costs
Long-term investments - Rabbi Trust 1
Other
Accounts payable and accrued liabilities:
Trade accounts payable
Drilling costs
Royalties
Production and franchise taxes
Compensation 2, 3
Interest
Other
Other liabilities:
Asset retirement obligations
Defined benefit pension obligations 2
Postretirement health care benefit obligations 2
Deferred compensation 1
Other
As of December 31,
2010
2011
14,251 $
699
14,950 $
16,993 $
3,088
51
20,132 $
30,186 $
30,948
15,235
3,495
5,186
5,964
3,490
94,504 $
6,283 $
1,763
3,022
3,172
1,647
15,887 $
3,600
633
4,233
14,300
6,440
47
20,787
33,831
31,770
9,308
6,012
9,631
2,977
6,132
99,661
7,364
1,766
2,976
6,952
900
19,958
$
$
$
$
$
$
$
$
1 Represents the assets and liabilities of the Company's nonqualified supplemental employee retirement savings plan. Assets of the plan are
held in a Rabbi Trust. Shares of the Company's common stock held by the Rabbi Trust are presented as Treasury stock carried at cost.
2 Includes the combined unfunded benefit obligations under the Company's defined benefit pension and postretirement health care plans of
$5.4 million as of December 31, 2011 and 2010. The expense recognized with respect to these plans was $0.4 million, $0.6 million and
$0.6 million, for the years ended December 31, 2011, 2010 and 2009, respectively.
3 Includes employer matching obligations under the Company's defined contribution retirement plan of $0.3 million as of December 31,
2011 and 2010. The expense recognized with respect to this plan was $1.2 million, $1.7 million and $2.3 million for the years ended
December 31, 2011, 2010 and 2009, respectively.
11. 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 to sell an asset or pay to transfer a liability in an orderly
transaction with market participants at the measurement date.
We use a hierarchy that prioritizes the inputs we use to measure fair value into three distinct categories based upon whether such
inputs are observable in active markets or unobservable. We classify assets and liabilities in their entirety based on the lowest level of input
that is significant to the fair value measurement. Our methodology for categorizing assets and liabilities that are measured at fair value
pursuant to this hierarchy gives the highest priority to unadjusted quoted prices in active markets and the lowest level to unobservable
inputs as outlined below:
68
Fair value measurements are classified and disclosed in one of the following three categories:
•
•
•
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets
or liabilities. Level 1 inputs generally provide the most reliable evidence of fair value.
Level 2: Quoted prices in markets that are not active or inputs, which are observable, either directly or indirectly, for
substantially the full term of the asset or liability.
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and
unobservable (i.e., supported by little or no market activity).
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 December 31, 2011, the carrying values of all of these financial instruments, except the
portion of long-term debt with fixed interest rates, approximated fair value.
The following table summarizes the fair value of our long-term debt with fixed interest rates, which is estimated based on the
published market prices for these debt obligations as of the dates presented:
December 31, 2011
Fair
Value
Carrying
Value
December 31, 2010
Fair
Value
Value
Carrying
Senior Notes due 2016
Senior Notes due 2019
Convertible Notes
$
$
319,500 $
280,500
4,925
604,925 $
293,561 $
300,000
4,746
598,307 $
335,712 $
-
225,975
561,687 $
292,487
-
214,049
506,536
69
Recurring Fair Value Measurements
Certain financial assets and liabilities are measured at fair value on a recurring basis in our Consolidated Balance Sheets. The
following tables summarize the valuation of those assets and liabilities as of the dates presented:
Description
Assets:
Commodity derivative assets - current
Commodity derivative assets - noncurrent
Long-term investments - Rabbi Trust
Liabilities:
Commodity derivative liabilities - current
Commodity derivative liabilities - noncurrent
Deferred compensation - noncurrent
Totals
Description
Assets:
Commodity derivative assets - current
Commodity derivative assets - noncurrent
Interest rate swap assets - current
Interest rate swap assets - noncurrent
Long-term investments - Rabbi Trust
Liabilities:
Commodity derivative liabilities - current
Deferred compensation - noncurrent
Totals
Fair Value
Measurement
As of December 31, 2011
Fair Value Measurement Classification
Level 3
Level 2
Level 1
$
$
18,987 $
-
3,088
- $
-
3,088
18,987 $
-
-
(3,549)
(6,850)
(3,168)
8,508 $
-
-
(3,168)
(80) $
(3,549)
(6,850)
-
8,588 $
Fair Value
Measurement
As of December 31, 2010
Fair Value Measurement Classification
Level 3
Level 2
Level 1
$
15,075 $
3,042
1,743
847
6,440
- $
-
-
-
6,440
15,075 $
3,042
1,743
847
-
(388)
(6,948)
-
(6,948)
(388)
-
$
19,811 $
(508) $
20,319 $
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
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 oil and gas 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 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.
Interest rate swaps: We determine the fair values of our interest rate swaps using an income approach valuation technique that
connects future cash flows to a single discounted value. We estimate the fair value of the swaps based on published interest rate
yield curves as of the date of the estimate. Each of these is a level 2 input.
Long-term investments – Rabbi Trust: 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: Certain of our deferred compensation obligations are ultimately to be settled in cash based on the
underlying fair value of certain assets, including those held in the Rabbi Trust. The fair values are based on quoted market
prices, which are level 1 inputs.
Non-Recurring Fair Value Measurements
The most significant non-recurring fair value measurements include the fair value of proved properties, tubular inventory and well
materials for purposes of impairment testing and the initial determination of AROs. The factors used to determine fair value for purposes of
impairment testing include, but are not limited to, estimates of proved and probable reserves, future commodity prices, 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.
70
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 fair value estimates as level 3 inputs.
In addition to these non-recurring fair value measurements, we utilized fair value measurements in the determination of the loss on
the extinguishment of approximately 98% of our Convertible Notes. In connection with that determination, we were required to allocate the
cash paid to repurchase the Convertible Notes to its liability and equity components. The allocation to the liability component was based on
the fair value of a comparable debt instrument that has no conversion feature. The residual amount of cash paid to repurchase the
Convertible Notes was allocated to the equity component.
12. Commitments and Contingencies
The following table sets forth our significant commitments as of December 31, 2011, by category, for the next five years and
thereafter:
Year
2012
2013
2014
2015
2016
Thereafter
Total
Rental Commitments
Minimum
Rental
Firm
Transportation
Drilling
Commitments Commitments Commitments
10,255
$
8,805
6,137
5,137
4,271
30,957
65,562
3,120 $
2,283
1,737
1,628
1,456
1,963
12,187 $
23,820 $
59
-
-
-
-
23,879 $
$
Operating lease rental expense in the years ended December 31, 2011, 2010 and 2009 was $11.4 million, $14.8 million and $18.0
million, respectively, related primarily to field equipment, office equipment and office leases.
Drilling Commitments
We have agreements to purchase oil and gas well drilling services from third parties with original terms of up to three years. The
agreements include early termination provisions that would require us to pay penalties if we terminate the agreements prior to the end of
their original terms. The amount of penalty is based on the number of days remaining in the contractual term and declines as time passes.
As of December 31, 2011, the penalty amount would have been $14.1 million if we had terminated our agreements on that date.
Firm Transportation Commitments
We have entered into contracts that provide firm transportation capacity rights for specified volumes per day on various pipeline
systems with terms that range from one to 15 years. The contracts require us to pay transportation demand charges regardless of the amount
of pipeline capacity we use. We may sell excess capacity to third parties at our discretion.
Legal
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 2011, we recorded a $0.2 million reserve for litigation attributable to certain
properties that were previously sold. This litigation was settled in January 2012 for the recorded amount. During 2010, we established a
$0.9 million reserve for a litigation matter pertaining to certain properties that remains outstanding as of December 31, 2011. During 2010,
we also established a $0.5 million reserve for a sales tax audit contingency, which was ultimately resolved during 2011 for $0.3 million.
71
Environmental Compliance
Extensive federal, state and local laws govern oil and natural gas operations, regulate the discharge of materials into the environment
or otherwise relate to the protection of the environment. Numerous governmental departments issue rules and regulations to implement and
enforce such laws that are often difficult and costly to comply with and which carry substantial administrative, civil and even criminal
penalties for failure to comply. Some laws, rules and regulations relating to protection of the environment may, in certain circumstances,
impose “strict liability” for environmental contamination, rendering a person liable for environmental and natural resource damages and
cleanup costs without regard to negligence or fault on the part of such person. Other laws, rules and regulations may restrict the rate of oil
and natural gas production below the rate that would otherwise exist or even prohibit exploration or production activities in sensitive areas.
In addition, state laws often require some form of remedial action to prevent pollution from former operations, such as plugging of
abandoned wells. As of December 31, 2011, we have recorded AROs of $6.3 million attributable to these activities. The regulatory burden
on the oil and natural gas industry increases its cost of doing business and consequently affects its profitability. These laws, rules and
regulations affect our operations, as well as the oil and gas exploration and production industry in general. We believe that we are in
substantial compliance with current applicable environmental laws, rules and regulations and that continued compliance with existing
requirements will not have a material impact on our financial condition or results of operations. Nevertheless, changes in existing
environmental laws or the adoption of new environmental laws, including any significant limitation on the use of hydraulic fracturing, have
the potential to adversely affect our operations.
13. Shareholders’ Equity
Common Stock
In May 2010, the shareholders of the Company approved an increase in the authorized number of shares of common stock from 64
million to 128 million shares.
In May 2009, we issued 3,500,000 shares of our common stock in a registered public offering that provided $64.8 million of net
proceeds. The net proceeds were used, in addition to the proceeds from the issuance of the Senior Notes due 2016, to repay borrowings
under our previous revolving credit facility.
Accumulated Other Comprehensive Loss
Accumulated other comprehensive losses are entirely attributable to our pension and postretirement benefit obligations. The
accumulated losses, net of tax, were $1.1 million, $0.9 million and $1.3 million as of December 31, 2011, 2010 and 2009, respectively.
Treasury Stock
We maintain nonqualified deferred compensation supplemental retirement savings plans for certain employees and directors.
Participants in the plans may defer and contribute a portion of their compensation to a Rabbi Trust. We include the assets and liabilities of
the supplemental retirement savings plans on our Consolidated Balance Sheets. Shares of the Company’s common stock purchased under
the non-qualified deferred compensation plans are held in the Rabbi Trust and are presented as treasury stock carried at cost. A total of
223,886 and 125,357 shares have been recorded as treasury stock as of December 31, 2011 and 2010, respectively.
Noncontrolling Interests
In connection with the sale of our remaining PVG Common Units (Note 3), we deconsolidated PVG from our Consolidated Financial
Statements resulting in the elimination of PVG’s assets and liabilities as well as the related noncontrolling interests from our Consolidated
Balance Sheet and Consolidated Statements of Shareholders’ Equity and Comprehensive Income.
Prior to the final sale of our PVG Common Units, we reduced our limited partner interest in PVG during 2010 and 2009 while still
maintaining control. In April 2010, we completed the sale of 11.25 million units of PVG owned by us for proceeds of $199.1 million, net
of offering costs reducing our limited partner interest in PVG from 51.4% to 22.6%. The transaction resulted in a $70.2 million increase in
noncontrolling interests and an $82.9 million increase to additional paid-in capital, net of income tax effects. In September 2009, we sold
10 million units of PVG for proceeds of $118.1 million, net of offering costs reducing our limited partner interest in PVG from 77.0% to
51.4%. The transaction resulted in a $67.7 million increase in noncontrolling interests and a $32.7 million increase to additional paid-in
capital, net of income tax effects.
14. Share-Based Compensation
We have stock compensation plans (collectively, the “Stock Compensation Plans”) that allow incentive and nonqualified stock
options, restricted stock and restricted stock units to be granted to key employees and officers and nonqualified stock options and deferred
common stock units to be granted to directors. As of December 31, 2011, there were approximately 2,227,554 and 196,314 shares available
for issuance to employees and directors, respectively, pursuant to the Stock Compensation Plans.
72
The following table summarizes the share-based compensation expense recognized for the periods presented:
Stock option plans
Common, deferred, restricted and restricted unit plans
Stock Options
Year Ended December 31,
2010
2011
2009
$
$
5,477 $
1,953
7,430 $
5,828 $
1,983
7,811 $
6,602
2,525
9,127
The exercise price of all options granted under the Stock Compensation Plans is equal to the fair market value of our common stock
on the date of the grant. Options may be exercised at any time after vesting and prior to ten years following the date of grant. Options vest
upon terms established by the compensation and benefits committee of our board of directors (the “Committee”). Generally, options vest
over a three-year period, with one-third vesting in each year. In addition, all options will vest upon a change of control of the Company, as
defined in the Stock Compensation Plans. In the case of employees, if a grantee’s employment terminates (i) for cause, all of the grantee’s
options, whether vested or unvested, will be automatically forfeited, (ii) by reason of death, disability or retirement after becoming
retirement eligible (age 62 and providing ten consecutive years of service) the grantee’s options will automatically vest and (iii) for any
other reason, the grantee’s unvested options will be automatically forfeited. In the case of directors, if a grantee’s membership on our board
of directors terminates for any reason, the grantee’s unvested options will be automatically forfeited. We have consistently issued new
shares to satisfy share option exercises.
The fair value of each option award is estimated on the date of grant using the Black-Scholes-Merton option-pricing formula that
uses the assumptions noted in the following table. Expected volatilities are based on historical changes in the market value of our stock.
Separate groups of employees that have similar historical exercise behavior are considered separately to estimate expected lives. Options
granted have a maximum term of ten years. We base the risk-free interest rate on the U.S. Treasury rate for the week of the grant having a
term equal to the expected life of the option.
Expected volatility
Dividend yield
Expected life
Risk-free interest rate
2011
61.7% to 71.9%
1.25% to 2.25%
3.5 to 4.6 years
0.39% to 2.18%
2010
59.5% to 67.6%
0.90% to 1.20%
3.5 to 4.6 years
0.68% to 2.30%
2009
51.7% to 64.9%
1.25% to 1.49%
3.5 to 4.6 years
1.23% to 1.84%
The following table summarizes activity for our most recent fiscal year with respect to awarded options:
Outstanding at beginning of year
Granted
Exercised
Forfeited
Outstanding at end of year
Exercisable at end of year
Shares Under
Options
Weighted-
Average
Exercise Price
24.70
16.98
11.89
23.26
22.84
26.74
2,144,357 $
830,021
(95,516)
(403,788)
2,475,074 $
1,352,273 $
Weighted-
Average
Remaining
Contractual
Term
Aggregate
Intrinsic Value
7.4 $
6.4 $
67
12
The weighted-average grant-date fair value of options granted during the years ended December 31, 2011, 2010 and 2009 was $7.30,
$10.13 and $5.60 per option. The total intrinsic value of options exercised during the years ended December 31, 2011 and 2010 was $0.4
million and $1.2 million. There were no options exercised during 2009.
As of December 31, 2011, we had $6.5 million of unrecognized compensation cost related to unvested stock options. We expect that
cost to be recognized over a weighted-average period of 0.9 years. The total grant-date fair values of stock options that vested in 2011, 2010
and 2009 were $3.7 million, $4.6 million and $5.7 million, respectively.
73
Restricted Stock
Restricted stock vests upon terms established by the Committee and as specified in the award agreement. In addition, all restricted
stock will vest upon a change of control of the Company. If a grantee’s employment terminates for any reason other than death or
disability, the grantee’s restricted stock will be automatically forfeited unless otherwise determined by the Committee and specified in the
award agreement. If a grantee’s employment terminates by reason of death or disability, or if a grantee becomes retirement eligible, the
grantee’s restricted stock will automatically vest. Except as specified by the Committee, a grantee shall be entitled to receive any dividends
declared on our common stock. Restricted stock vests generally over a three-year period, with one-third vesting in each year. We recognize
compensation expense on a straight-line basis over the vesting period.
The following table summarizes activity for our most recent fiscal year with respect to awarded nonvested restricted stock:
Balance at beginning of year
Vested
Balance at end of year
Nonvested
Restricted
Stock
Weighted-Average
Grant Date
Fair Value
5,957 $
(5,957)
- $
42.27
42.27
-
The total grant-date fair values of restricted stock that vested in 2011, 2010 and 2009 were $0.3 million, $0.5 million and $1.3
million, respectively.
Deferred Common Stock Units
A portion of the compensation paid to non-employee members of our board of directors is paid in deferred common stock units. Each
deferred common stock unit represents one share of common stock, vests immediately upon issuance, and is available to the holder upon
termination or retirement from our board of directors. Deferred common stock units awarded to directors receive all cash or other dividends
we pay on shares of our common stock.
The following table summarizes activity for our most recent fiscal year with respect to awarded deferred common stock units:
Balance at beginning of year
Granted
Balance at end of year
Deferred
Common Stock
Units
Weighted-Average
Grant Date
Fair Value
103,256 $
105,527
208,783 $
26.76
8.31
17.34
As of December 31, 2011, 2010 and 2009, shareholders’ equity included deferred compensation obligations of $3.6 million, $2.7
million and $2.4 million, respectively, and corresponding amounts for treasury stock.
Restricted Stock Units
A restricted stock unit entitles the grantee to receive a share of common stock upon the vesting of the restricted stock unit or, at the
discretion of the Committee, the cash equivalent of the fair market value of a share of common stock. The Committee determines the time
period over which restricted stock units granted to employees and directors will vest. In addition, all restricted stock units will vest upon a
change of control of the Company. If an employee’s employment with us or our affiliates terminates for any reason other than death,
disability or retirement after becoming retirement eligible, the grantee’s restricted stock units will be automatically forfeited unless, and to
the extent, the Committee provides otherwise. Restricted stock units generally vest over a three-year period, with one-third vesting in each
year. The Committee, in its discretion, may grant tandem dividend equivalent rights with respect to restricted stock units. A dividend
equivalent right is a right to receive an amount in cash equal to, and 30 days after, the cash dividends made with respect to a share of
common stock during the period such restricted stock unit is outstanding. Payments of dividend equivalent rights associated with restricted
stock units that are expected to vest are recorded as dividends; payments associated with restricted stock units that are not expected to vest
are recorded as compensation expense.
74
The following table summarizes activity for our most recent fiscal year with respect to awarded restricted stock units:
Balance at beginning of year 1
Granted
Vested
Balance at end of year 1
Weighted-Average
Restricted Stock
Units
Grant Date
Fair Value
72,215 $
78,763
(51,152)
99,826 $
18.77
17.14
18.38
18.10
1 Excludes 61,344 units at both the beginning and end of year that have vested due to retirement eligibility, but have not yet been settled or
converted to common shares.
As of December 31, 2011, we had $1.4 million of unrecognized compensation cost attributable to nonvested restricted stock units.
We expect that cost to be recognized over a weighted-average period of 0.8 years. The total grant-date fair values of restricted stock units
that vested in 2011, 2010 and 2009 were $0.9 million, $0.9 million and $0.6 million, respectively.
15. Restructuring Activities
During 2011, we completed an organizational restructuring due primarily to our decision to exit the Arkoma Basin and to consolidate
certain operations functions to our Houston, Texas location. This restructuring and consolidation resulted in the termination of
approximately 40 employees, most of whom were based out of our Tulsa, Oklahoma office, as well as certain corporate positions in
connection with a reallocation of administrative responsibilities. In addition, we closed our regional office in Tulsa, Oklahoma during the
fourth quarter of 2011and recorded a charge in connection with the long-term lease of that office.
During 2009 and 2010, we implemented an organization restructuring in connection with our transformation to a pure play
development, exploration and production company. The restructuring resulted in the termination of approximately 30 employees and the
transfer of certain corporate and division operations functions from our former Kingsport, Tennessee location to our Houston, Texas and
Pittsburgh and Radnor, Pennsylvania locations. We incurred special termination benefit costs, relocation costs and other incremental costs
associated with staffing and expanding our office locations.
These restructuring charges are included in the General and administrative expenses caption on our Consolidated Statements of
Operations and are comprised of the following for the periods presented:
Termination benefits
Employee and office relocation costs
Other incremental costs
Facility lease-related charges
2011
Year Ended December 31,
2010
2009
$
$
1,463 $
322
-
566
2,351 $
2,081 $
1,597
1,022
3,500
8,200 $
529
-
-
-
529
75
The following table summarizes our restructuring-related obligations as of and for the years ended December 31:
Balance at beginning of period
Termination benefits accrued
Employee, office and other costs accrued
Cash payments
Balance at end of period
16.
Impairments
2011
2010
2009
$
$
64 $
1,463
888
(1,839)
576 $
529 $
2,081
6,119
(8,665)
64 $
-
529
-
-
529
The following table summarizes impairment charges recorded during the periods presented:
Oil and gas properties
Other - tubular inventory and well materials
Year Ended December 31,
2010
2011
2009
$
$
104,688 $
-
104,688 $
43,067 $
2,892
45,959 $
102,332
4,083
106,415
During 2011, we recognized an impairment of our Arkoma Basin assets for $71.1 million, which was triggered by the expected
disposition of these high-cost gas properties. As disclosed in Note 3, we completed the sale of these properties in August 2011. Also during
2011, we recognized an impairment of our horizontal coal bed methane properties in the Appalachian region for $26.6 million and certain
dry-gas properties in Mississippi for $7.0 million due primarily to market declines in gas prices. During 2010, we incurred impairment
charges related to our Mid-Continent coal bed methane properties as a result of market declines in gas prices and to an area in the Anadarko
Basin of the Mid-Continent region where we drilled an uneconomic well. In addition, we recorded impairment charges attributable to
certain oil and gas inventory assets triggered primarily by declines in asset quality. During 2009, we incurred impairment charges in
connection with the initial classification of our Gulf Coast properties as assets held for sale at their fair value less costs to sell, as well as
impairments attributable to tubular inventory and other oil and gas properties.
17.
Interest Expense
The following table summarizes the components of interest expense for the periods presented:
Interest on borrowings and related fees
Accretion on original issue discount
Amortization of debt issuance costs
Interest rate swaps
Capitalized interest
Other, net
Year Ended December 31,
2010
2011
2009
$
$
51,384 $
3,427
3,380
-
(1,983)
8
56,216 $
43,060 $
8,109
3,875
-
(1,384)
19
53,679 $
33,374
7,523
2,679
3,969
(2,318)
(996)
44,231
76
18. Earnings per Share
The following table provides a reconciliation of the components used in the calculation of basic and diluted earnings per share for the
periods presented:
Loss from continuing operations
Income from discontinued operations, net of tax 1
Gain on sale of discontinued operations, net of tax
Less net income attributable to noncontrolling interests
Loss attributable to common shareholders
Less: Portion of subsidiary net income allocated to undistributed share-based
compensation awards, net of tax
$
$
$
Weighted-average shares, basic
Effect of dilutive securities 2
Weighted-average shares, diluted
Year Ended December 31,
2010
2011
(132,915) $
-
-
-
(132,915) $
-
(132,915) $
45,784
-
45,784
(65,327) $
33,448
51,546
(28,090)
(8,423) $
(28)
(8,451) $
45,553
-
45,553
2009
(130,856)
53,488
-
(37,275)
(114,643)
(116)
(114,759)
43,811
-
43,811
1 For purposes of determining earnings per share, net income attributable to noncontrolling interests is applied against income from
discontinued operations as both are completely attributable to PVG's operations.
2 For 2011, 2010 and 2009, an amount less than 0.1 million, approximately 0.2 million and 0.1 million potentially dilutive securities,
including the Convertible Notes, stock options, restricted stock and restricted stock units had the effect of being anti-dilutive and were
excluded from the calculation of diluted earnings per common share.
19. Discontinued Operations
Prior to June 2010, we indirectly owned partner interests in Penn Virginia Resource Partners, L.P. (“PVR”), a publicly traded limited
partnership formed by us in 2001. Our ownership interests in PVR were held principally through our general and limited partner interests in
PVG. During June 2010, we disposed of our remaining ownership interests in PVG and, indirectly, our interests in PVR.
Income from discontinued operations represents the results of operations of PVG, which include the results of operations of PVR.
Previously, the results of operations of PVG and PVR were presented as our coal and natural resource management and natural gas
midstream segments.
The disclosures for the 2010 period provided in the table below reflect the results of operations of PVG through the date of the
disposition of our entire remaining interest in PVG on June 7, 2010.
Revenues
Income from discontinued operations before taxes
Income tax expense 1
Income from discontinued operations, net of taxes
Year Ended December 31,
2010
2011
2009
- $
303,206 $
579,931
- $
-
- $
36,832 $
(3,384)
33,448 $
64,130
(10,642)
53,488
$
$
$
1 Determined by applying the effective tax rate attributable to discontinued operations to the income from discontinued operations less
noncontrolling interests that are fully attributable to PVG's operations.
77
The following table summarizes the determination of the gain recognized in 2010 upon the disposition of PVG:
Cash proceeds, net of offering costs (8,827,429 units x $15.76 per unit)
Carrying value of noncontrolling interests in PVG at date of disposition
Less: Carrying value of PVG's assets and liabilities at date of disposition
Income tax expense
Gain on sale of discontinued operations, net of tax
$
$
139,120
382,324
521,444
(434,782)
86,662
(35,116)
51,546
During 2011, we terminated certain agreements under which PVR provided marketing and gas gathering and processing services to
us. We continue to sell gas to PVR for resale at PVR’s Crossroads plant in East Texas. In connection with the disposition in 2010, we and
PVG entered into transition service agreements attributable primarily to corporate and information technology functions. We billed PVG
for transition services in the amount of $0.7 million, net of amounts charged to us by PVG, for the year ended December 31, 2010. This
amount is included in the General and administrative caption on our Consolidated Statements of Operations as a reduction to expenses.
78
Supplemental Quarterly Financial Information (Unaudited)
2011
Revenues
Operating loss 1
Loss attributable to Penn Virginia Corp.
Loss per share - Basic 2:
Loss per share - Diluted 2:
Weighted-average shares outstanding:
Basic
Diluted
2010
Revenues
Operating income (loss) 3
Net loss from continuing operations
Income (loss) from discontinued operations, net of tax
Gain on sale of discontinued operations, net of tax
Income (loss) attributable to Penn Virginia Corp.
Earnings (loss) per share - Basic 2:
Continuing operations
Discontinued operations
Gain on sale of discontinued operations
Net income (loss)
Earnings (loss) per share - Diluted 2:
Continuing operations
Discontinued operations
Gain on sale of discontinued operations
Net income (loss)
Weighted-average shares outstanding:
Basic
Diluted
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
68,583 $
(28,529) $
(26,340) $
(0.58) $
(0.58) $
73,618 $
(80,713) $
(71,918) $
(1.57) $
(1.57) $
83,353 $
(9,031) $
(6,718) $
(0.15) $
(0.15) $
45,687
45,687
45,768
45,768
45,817
45,817
67,878 $
92 $
10,766 $
12,174 $
- $
13,594 $
53,288 $
(20,878) $
(21,097) $
21,308 $
49,612 $
31,079 $
68,953 $
(53,053) $
(30,159) $
- $
- $
(30,159) $
0.24 $
0.06 $
- $
0.30 $
0.24 $
0.06 $
- $
0.30 $
(0.46) $
0.06 $
1.08 $
0.68 $
(0.46) $
0.06 $
1.08 $
0.68 $
(0.66) $
- $
- $
(0.66) $
(0.66) $
- $
- $
(0.66) $
80,451
(37,146)
(27,939)
(0.61)
(0.61)
45,864
45,864
64,319
(24,969)
(24,837)
(34)
1,934
(22,937)
(0.54)
-
0.04
(0.50)
(0.54)
-
0.04
(0.50)
45,465
45,761
45,539
45,790
45,591
45,591
45,615
45,615
1 Includes impairment of oil and gas properties of $71 million and $34 million during the quarters ended June 30, 2011 and December 31,
2011, respectively.
2 The sum of the quarters may not equal the total of the respective year's earnings per common share due to changes in weighted-average
shares outstanding throughout the year.
3 Includes an impairment of $1.1 million for oil and gas properties held for sale during the quarter ended June 30, 2010. Includes
impairments of oil and gas assets of $35.1 million and $9.7 million for the quarters ended September 30, 2010 and December 31, 2010,
respectively.
79
Supplemental Information on Oil and Gas Producing Activities (Unaudited)
The following supplemental information regarding the oil and gas producing activities is presented in accordance with the
requirements of the current oil and gas accounting standards.
Capitalized Costs Relating to Oil and Gas Producing Activities
Proved properties
Unproved properties
Wells, equipment and facilities
Support equipment
Accumulated depreciation and depletion
Net capitalized costs
As of December 31,
2010
2011
$
$
277,987 $
120,288
2,081,103
6,645
2,486,023
(710,948)
1,775,075 $
293,486 $
171,303
1,840,154
6,254
2,311,197
(609,380)
1,701,817 $
2009
353,386
73,067
1,527,749
5,938
1,960,140
(487,106)
1,473,034
ARO assets of $0.2 million, $0.1 million and $0.4 million were added to the cost basis of proved properties during the years ended
December 31, 2011, 2010 and 2009, respectively.
Costs Incurred in Certain Oil and Gas Activities
Proved property acquisition costs
Unproved property acquisition costs
Exploration costs
Development costs and other
Total costs incurred
Results of Operations for Oil and Gas Producing Activities
Year Ended December 31,
2010
2011
2009
$
$
- $
47,877
77,460
320,263
445,600 $
5,671 $
133,185
66,886
244,092
449,834 $
-
14,996
7,179
149,625
171,800
The following table includes results solely from the production and sale of oil and gas and non-cash charges for property
impairments. It excludes corporate-related general and administrative expenses and gains or losses on property dispositions. Income tax
expense (benefit) is calculated by applying statutory tax rates to revenues after deducting costs and giving effect to oil and gas-related
permanent differences and tax credits.
Revenues
Production expenses
Exploration expenses
Depreciation and depletion expense
Impairment of oil and gas properties
Income tax expense (benefit)
Results of operations
Year Ended December 31,
2010
2011
2009
$
$
300,046 $
65,835
78,943
160,293
104,688
(109,713)
(42,788)
(66,925) $
251,336 $
63,854
49,641
130,816
45,959
(38,934)
(15,184)
(23,750) $
228,659
72,255
57,754
150,429
106,415
(158,194)
(61,221)
(96,973)
A combined total of depletion and accretion expense related to AROs of $0.7 million was recognized in DD&A expense during each
of the years ended December 31, 2011, 2010 and 2009.
Oil and Gas Reserves
Reserve engineering is a process of estimating underground accumulations of oil and natural gas that cannot be measured in an exact
manner, and the accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological
interpretation and judgment. The quantities of crude oil and natural gas that are ultimately recovered, production and operating costs, the
amount and timing of future development expenditures and future crude oil and natural gas sales prices may all differ from those assumed.
In addition, reserve estimates of new discoveries are more imprecise than those of properties with a production history. Accordingly, these
estimates are subject to change as additional information becomes available.
80
Our Manager of Engineering is primarily responsible for overseeing the preparation of the Company’s reserve estimate by our
independent third party engineers, Wright & Company, Inc. The Manager of Engineering has over 26 years of industry experience in the
estimation and evaluation of reserve information, holds a B.S. degree in Petroleum Engineering from Texas A&M University and is
licensed by the state of Texas as a Professional Engineer. The Company’s internal controls over reserve estimates include reconciliation
and review controls, including an independent internal review of assumptions used in the estimation.
The technical person primarily responsible for review of our reserve estimates at Wright & Company, Inc., meets the requirements
regarding qualifications, independence, objectivity and confidentiality set forth in the Standards Pertaining to the Estimating and Auditing
of Oil and Gas Reserves Information promulgated by the Society of Petroleum Engineers. Wright & Company, Inc. is an independent firm
of petroleum engineers, geologists, geophysicists and petro physicists; they do not own an interest in our properties and are not employed
on a contingent fee basis.
The following table sets forth the Company’s net quantities of proved reserves, including changes therein and proved developed and
proved undeveloped reserves for the periods presented. This information includes our royalty and net working interest share of the reserves
in oil and gas properties. All reserves are located in the United States. Net proved oil and gas reserves for the three years ended December
31, 2011 were estimated by Wright & Company, Inc., utilizing data compiled by us.
Proved Developed and Undeveloped Reserves
December 31, 2008
Revisions of previous estimates 1
Extensions, discoveries and other additions 2
Production
Purchase of reserves
Sale of reserves in place
December 31, 2009
Revisions of previous estimates 3
Extensions, discoveries and other additions 4
Production
Purchase of reserves
Sale of reserves in place
December 31, 2010
Revisions of previous estimates 5
Extensions, discoveries and other additions 6
Production
Purchase of reserves
Sale of reserves in place
December 31, 2011
Proved Developed Reserves:
December 31, 2009
December 31, 2010
December 31, 2011
Natural
Gas
(MMcf)
Oil and
Total
Condensate Equivalents
(MBbl)
(MMcfe)
754,132
(110,349)
180,448
(43,337)
-
(4,229)
776,665
(71,421)
90,439
(38,919)
3,288
(15,070)
744,982
(61,165)
56,345
(33,410)
1
(36,840)
669,913
26,974
(8,442)
9,203
(1,277)
-
(71)
26,387
5,202
4,069
(1,380)
9
(1,490)
32,797
(5,414)
10,399
(2,190)
20
(42)
35,570
915,975
(160,995)
235,666
(51,000)
-
(4,659)
934,987
(40,210)
114,851
(47,201)
3,342
(24,014)
941,755
(93,649)
118,746
(46,553)
124
(37,092)
883,331
388,382
412,644
330,552
8,357
14,813
16,470
438,524
501,521
429,370
Proved Undeveloped Reserves:
496,463
December 31, 2009
440,234
December 31, 2010
December 31, 2011
453,961
1 We had downward revisions of 161 Bcfe which were primarily the result of the following: 1) downward revisions of 63.1 Bcfe due to
price, 2) a downward revision of 27.1 Bcfe in Appalachia for the removal of proved undeveloped reserves, which resulted from wells
that no longer met the reasonable certainty threshold, 3) downward revisions of 20.1 Bcfe for NGLs that we received in East Texas as a
result of lower plant yields and 4) various downward revisions amounting to 50.7 Bcfe across our assets as a result of well performance
and the application of the revised oil and gas reserve calculation methodology required by the SEC in 2009.
388,283
332,338
339,361
18,030
17,984
19,100
2 We added 235.7 Bcfe due to the drilling of 13 wells on locations that were not classified as proved undeveloped locations in our 2008
year-end reserve report and the addition of 105 new proved undeveloped locations, primarily in the Gulf Coast and Mid-Continent
regions, as a result of our 2009 drilling activities.
3 We had downward revisions of 40.2 Bcfe primarily as a result of the following: 1) downward revisions of 45 Bcfe due to the removal of
200 proved undeveloped locations that would not be developed within five years, 2) upward revisions of 34 Bcfe as a result of
processing the gas in the Mid-Continent Granite Wash for NGLs, 3) upward revisions of 12 Bcfe due to higher prices and 4) various
downward revisions for 39 Bcfe across our assets as a result of well performance, lease expirations and interest changes.
4 We added 114.9 Bcfe due to the drilling of 16 wells on locations not classified as proved undeveloped locations in our 2009 year-end
reserve report and the addition of 51 new proved undeveloped locations, primarily in East Texas, as a result of our 2010 drilling
activities.
5 We had downward revisions of 93.6 Bcfe primarily as a result of the following: 1) downward revisions of 72 Bcfe due to well
performance issues, interest changes and economic limits attributable to operating conditions particularly in the Granite Wash, Cotton
Valley and Selma Chalk, 2) downward revisions of 10 Bcfe due to lower condensate yield in the Granite Wash, 3) downward revisions
of 9 Bcfe attributable to the elimination of proved undeveloped locations particularly in the Haynesville Shale in East Texas, 4)
downward revisions of 5 Bcfe due to lower natural gas prices and 5) upward revisions of 3 Bcfe due to higher gas processing yields in
the Haynesville Shale and Granite Wash.
6 We added 118.7 Bcfe due primarily to an increase of 54 Bcfe due to the drilling of three Marcellus Shale wells and two Granite Wash
wells as well as the addition of 25 proved undeveloped locations in the Marcellus Shale and Selma Chalk. We also drilled 28 Eagle Ford
Shale wells and added 26 proved undeveloped locations which resulted in an increase of 65 Bcfe.
81
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves
The following table sets forth the standardized measure of the discounted future net cash flows attributable to our proved reserves.
Future cash inflows were computed by applying the average prices of oil and gas during the 12-month period prior to the period end
determined as an unweighted arithmetic average of the first-day-of-the-month price for each month within the period and estimated costs as
of that fiscal year end to the estimated future production of proved reserves. Natural gas prices were escalated only where existing contracts
contained fixed and determinable escalation clauses. Contractually provided natural gas prices in excess of estimated market clearing prices
were used in computing the future cash inflows only if we expect to continue to receive higher prices under legally enforceable contract
terms. Future prices actually received may materially differ from current prices or the prices used in the standardized measure.
Future production and development costs represent the estimated future expenditures (based on current costs) to be incurred in
developing and producing the proved reserves, assuming continuation of existing economic conditions. Future income tax expenses were
computed by applying statutory income tax rates to the difference between pre-tax net cash flows relating to our proved reserves and the
tax basis of proved oil and gas properties. In addition, the effects of statutory depletion in excess of tax basis, available net operating loss
carryforwards and alternative minimum tax credits were used in computing future income tax expense. The resulting annual net cash
inflows were then discounted using a 10% annual rate.
Future cash inflows
Future production costs
Future development costs
Future net cash flows before income tax
Future income tax expense
Future net cash flows
10% annual discount for estimated timing of cash flows
Standardized measure of discounted future net cash flows
Year Ended December 31,
2010
4,833,030 $
(1,388,857)
(879,193)
2,564,980
(687,928)
1,877,052
(1,235,633)
641,419 $
2011
5,032,915 $
(1,374,658)
(1,091,100)
2,567,157
(665,751)
1,901,406
(1,246,910)
654,496 $
2009
4,178,449
(1,300,235)
(888,493)
1,989,721
(491,832)
1,497,889
(973,118)
524,771
$
$
Changes in Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves
Sales of oil and gas, net of production costs
Net changes in prices and production costs
Extensions, discoveries and other additions
Development costs incurred during the period
Revisions of previous quantity estimates
Purchases of reserves-in-place
Sale of reserves-in-place
Accretion of discount
Net change in income taxes
Other changes
Net increase (decrease)
Beginning of year
End of year
$
$
Year Ended December 31,
2010
2011
(234,211) $
(25,398)
361,284
44,741
(113,188)
308
(37,474)
87,815
16,818
(87,618)
13,077
641,419
654,496 $
(180,568) $
180,316
59,729
153,563
(50,471)
2,239
(47,740)
68,817
(73,332)
4,095
116,648
524,771
641,419 $
2009
(157,891)
(314,209)
138,482
65,043
(158,844)
-
-
90,796
15,168
116,825
(204,630)
729,401
524,771
The standardized measure of discounted future net cash flows is not intended, and should not be interpreted, to represent the fair
value of our oil and gas reserves. An estimate of the fair value would also consider, among other things, the recovery of reserves not
presently classified as proved, anticipated future changes in prices and cost, and a discount factor more representative of economic
conditions and risks inherent in reserve estimates. Accordingly, the changes in standardized measure reflected above do not necessarily
represent the economic reality of such transactions. See “Costs Incurred in Certain Oil and Gas Activities” earlier in this Note and our
Consolidated Statements of Cash Flows.
82
Item 9 Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A
Controls and Procedures
(a) Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial
Officer, we performed an evaluation of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of
the Exchange Act) as of December 31, 2011. Our disclosure controls and procedures are designed to ensure that information required to be
disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported accurately and on
a timely basis. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that, as of December 31,
2011, such disclosure controls and procedures were effective.
(b) Management’s Annual Report on Internal Control Over Financial Reporting
Our management, including our Chief Executive Officer and our Chief Financial Officer, is responsible for establishing and
maintaining adequate internal control over our financial reporting. Our management assessed the effectiveness of our internal control over
financial reporting as of December 31, 2011. This evaluation was completed based on the framework established in Internal Control—
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Our management has concluded that, as of December 31, 2011, our internal control over financial reporting was effective.
(c) Attestation Report of the Registered Public Accounting Firm
KPMG LLP, an independent registered public accounting firm, has issued an attestation report on the internal control over financial
reporting as of December 31, 2011, which is included in Item 8 of this Annual Report on Form 10-K.
(d) Changes in Internal Control Over Financial Reporting
No changes were made in our internal control over financial reporting that occurred during our last fiscal quarter that have materially
affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B
Other Information
There was no information that was required to be disclosed by us on a Current Report on Form 8-K during the fourth quarter of 2011
which we did not disclose.
83
Item 10
Directors, Executive Officers and Corporate Governance
Part III
In accordance with General Instruction G(3), reference is hereby made to the Company’s definitive proxy statement to be filed within
120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.
Item 11
Executive Compensation
In accordance with General Instruction G(3), reference is hereby made to the Company’s definitive proxy statement to be filed within
120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.
Item 12
Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
In accordance with General Instruction G(3), reference is hereby made to the Company’s definitive proxy statement to be filed within
120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.
Item 13
Certain Relationships and Related Transactions, and Director Independence
In accordance with General Instruction G(3), reference is hereby made to the Company’s definitive proxy statement to be filed within
120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.
Item 14
Principal Accountant Fees and Services
In accordance with General Instruction G(3), reference is hereby made to the Company’s definitive proxy statement to be filed within
120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.
84
Item 15
Exhibit and Financial Statement Schedules
The following documents are filed as exhibits to this Annual Report on Form 10-K:
Part IV
(1)
(2.1)
(3.1)
(3.1.1)
(3.1.2)
(3.1.3)
(3.1.4)
(3.2)
(4.1)
(4.1.1)
Financial Statements — The financial statements filed herewith are listed in the Index to Consolidated Financial Statements on
page 50 of this Annual Report on Form 10-K.
Purchase and Sale Agreement dated July 28, 2011, by and among Penn Virginia MC Energy L.L.C., Penn Virginia Oil & Gas
Corporation and Unit Petroleum Company, as amended by Amendment and Supplement to Purchase and Sale Agreement dated
August 31, 2011 (incorporated by reference to Exhibit 2.1 to Registrant’s Current Report on Form 8-K filed on September 7,
2011).
Articles of Incorporation of Penn Virginia Corporation (incorporated by reference to Exhibit 3.1 to Registrant’s Annual Report on
Form 10-K for the year ended December 31, 1999).
Articles of Amendment of Articles of Incorporation of Penn Virginia Corporation (incorporated by reference to Exhibit 3.2 to
Registrant’s Annual Report on Form 10-K for the year ended December 31, 1999).
Articles of Amendment of Articles of Incorporation of Penn Virginia Corporation (incorporated by reference to Exhibit 3 to
Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2004).
Articles of Amendment of Articles of Incorporation of Penn Virginia Corporation (incorporated by reference to Exhibit 3.1 to
Registrant’s Current Report on Form 8-K filed on June 12, 2007).
Articles of Amendment of Articles of Incorporation of Penn Virginia Corporation (incorporated by reference to Exhibit 3.1 to
Registrant’s Current Report on Form 8-K filed on May 10, 2010).
Amended and Restated Bylaws of Penn Virginia Corporation (incorporated by reference to Exhibit 3.1 to Registrant’s Current
Report on Form 8-K filed on February 18, 2011).
Subordinated Indenture dated December 5, 2007 among Penn Virginia Corporation, as Issuer, the Subsidiary Guarantors named
therein, and Wells Fargo Bank, N.A., as Trustee (incorporated by reference to Exhibit 4.1 to Registrant’s Current Report on Form
8-K filed on December 5, 2007).
First Supplemental Indenture relating to the 4.50% Convertible Senior Subordinated Notes due 2012, dated December 5, 2007
between Penn Virginia Corporation, as Issuer, and Wells Fargo Bank, N.A., as Trustee (incorporated by reference to Exhibit 4.2
to Registrant’s Current Report on Form 8-K filed on December 5, 2007).
(4.1.2)
Form of Note for 4.50% Convertible Senior Subordinated Notes due 2012 (incorporated by reference to Exhibit A to Exhibit 4.2
to Registrant’s Current Report on Form 8-K filed on December 5, 2007).
(4.2)
(4.2.1)
(4.2.2)
(4.2.3)
(4.2.4)
(4.2.5)
(10.1)
Senior Indenture dated June 15, 2009 among Penn Virginia Corporation, as Issuer, the Subsidiary Guarantors named therein, and
Wells Fargo Bank, National Association, as Trustee (incorporated by reference to Exhibit 4.1 to Registrant’s Current Report on
Form 8-K filed on June 16, 2009).
First Supplemental Indenture relating to the 10.375% Senior Notes due 2016, dated June 15, 2009 among Penn Virginia
Corporation, as Issuer, the Subsidiary Guarantors named therein and Wells Fargo Bank, National Association, as Trustee
(incorporated by reference to Exhibit 4.1 to Registrant’s Current Report on Form 8-K/A filed on June 18, 2009).
Second Supplemental Indenture relating to the 10.375% Senior Notes due 2016, dated April 4, 2011 among Penn Virginia
Corporation, as Issuer, the Subsidiary Guarantors named therein and Wells Fargo Bank, National Association, as Trustee
(incorporated by reference to Exhibit 4.1 to Registrant’s Current Report on Form 8-K filed on April 5, 2011).
Form of Note for 10.375% Senior Notes due 2016 (incorporated by reference to Annex A to Exhibit 4.1 to Registrant’s Current
Report on Form 8-K/A filed on June 18, 2009).
Third Supplemental Indenture relating to the 7.25% Senior Notes due 2019, dated April 13, 2011, among Penn Virginia
Corporation, as Issuer, the Subsidiary Guarantors named therein and Wells Fargo Bank, National Association, as Trustee
(incorporated by reference to Exhibit 4.2 to Registrant’s Current Report on Form 8-K filed on April 14, 2011).
Form of Note for 7.25% Senior Notes due 2019 (incorporated by reference to Exhibit 4.3 to Registrant’s Current Report on Form
8-K filed on April 14, 2011).
Amended and Restated Credit Agreement dated as of August 2, 2011 among Penn Virginia Holding Corp., as borrower, Penn
Virginia Corporation, as parent, the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent (incorporated
by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed on August 4, 2011).
85
(10.1.2)
First Amendment to Amended and Restated Credit Agreement dated January 11, 2012 among Penn Virginia Holding Corp., as
borrower, Penn Virginia Corporation, as parent, the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative
agent (incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed on January 17, 2012).
(10.2)
(10.4)
Contribution Agreement dated June 7, 2010 by and among Penn Virginia Resource GP Corp., Penn Virginia GP Holdings, L.P.
and PVG GP, LLC (incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed on June 7, 2010).
Penn Virginia Corporation Supplemental Employee Retirement Plan (incorporated by reference to Exhibit 10.1 to Registrant’s
Current Report on Form 8-K filed on October 29, 2007).*
(10.4.1) Amendment 2009-1 to the Penn Virginia Corporation Supplemental Employee Retirement Plan.*
(10.5)
Penn Virginia Corporation Amended and Restated Non-Employee Directors Deferred Compensation Plan (incorporated by
reference to Exhibit 10.2 to Registrant’s Current Report on Form 8-K filed on October 29, 2007).*
(10.5.1) Amendment One to the Penn Virginia Corporation Amended and Restated Non-Employee Directors Deferred Compensation Plan
(incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed on May 6, 2011).*
(10.6)
Penn Virginia Corporation Fifth Amended and Restated 1995 Directors’ Compensation Plan (incorporated by reference to Exhibit
10.29 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2007). *
(10.6.1)
Form of Agreement for Deferred Common Stock Unit Grants under the Penn Virginia Corporation Fifth Amended and Restated
1995 Directors’ Compensation Plan (incorporated by reference to Exhibit 10.30 to Registrant’s Annual Report on Form 10-K for
the year ended December 31, 2007).*
(10.7)
Penn Virginia Corporation Seventh Amended and Restated 1999 Employee Stock Incentive Plan (incorporated by reference to
Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed on August 2, 2010).*
(10.7.1) Amendment No. 1 to the Penn Virginia Corporation Seventh Amended and Restated 1999 Employee Stock Incentive Plan
(incorporated by reference to Exhibit 10.2 to Registrant’s Current Report on Form 8-K filed on May 6, 2011).*
(10.7.2)
(10.7.3)
(10.7.4)
(10.8)
(10.9)
Form of Agreement for Stock Option Grants under the Penn Virginia Corporation Seventh Amended and Restated 1999
Employee Stock Incentive Plan (incorporated by reference to Exhibit 10.6 to Registrant’s Current Report on Form 8-K filed on
October 29, 2007).*
Form of Agreement for Restricted Stock Awards under the Penn Virginia Corporation Seventh Amended and Restated 1999
Employee Stock Incentive Plan (incorporated by reference to Exhibit 10.33 to Registrant’s Annual Report on Form 10-K for the
year ended December 31, 2007).*
Form of Agreement for Restricted Stock Unit Awards under the Penn Virginia Corporation Seventh Amended and Restated 1999
Employee Stock Incentive Plan (incorporated by reference to Exhibit 10.2 to Registrant’s Current Report on Form 8-K filed on
February 23, 2009).*
Executive Change of Control Severance Agreement dated October 17, 2008 between Penn Virginia Corporation and Nancy M.
Snyder (incorporated by reference to Exhibit 10.3 to Registrant’s Current Report on Form 8-K filed on October 22, 2008).*
Executive Change of Control Severance Agreement dated October 17, 2008 between Penn Virginia Corporation and H. Baird
Whitehead (incorporated by reference to Exhibit 10.4 to Registrant’s Current Report on Form 8-K filed on October 22, 2008).*
(10.10)
Executive Change of Control Severance Agreement dated December 8, 2010 between Penn Virginia Corporation and Steven A.
Hartman (incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed on December 10, 2010).*
(10.11)
Executive Change of Control Severance Agreement dated October 26, 2011 between Penn Virginia Corporation and John A.
Brooks. *
(10.12)
Executive Change of Control Severance Agreement dated October 17, 2008 between Penn Virginia Corporation and Michael E.
Stamper. *
86
(10.13)
Amended and Restated Change of Location Severance Agreement dated March 30, 2010 between Penn Virginia Corporation and
Nancy M. Snyder (incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed on March 31,
2010).*
(10.14)
Penn Virginia Corporation 2011 Annual Incentive Cash Bonus and Long-Term Equity Compensation Guidelines (incorporated
by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed on March 1, 2011).*
(12.1)
Statement of Computation of Ratio of Earnings to Fixed Charges Calculation.
(14.1)
Penn Virginia Corporation Code of Business Conduct and Ethics (incorporated by reference to Exhibit 14.1 to Registrant’s
Current Report on Form 8-K filed on July 27, 2009).
(21.1)
Subsidiaries of Penn Virginia Corporation.
(23.1)
Consent of KPMG LLP.
(23.2)
Consent of Wright & Company, Inc.
(31.1)
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(31.2)
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(32.1)
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(32.2)
Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(99.1)
Report of Wright & Company, Inc. dated January 20, 2012 concerning evaluation of oil and gas reserves.
(101.INS) XBRL Instance Document
(101.SCH) XBRL Taxonomy Extension Schema Document
(101.CAL) XBRL Taxonomy Extension Calculation Linkbase Document
(101.DEF) XBRL Taxonomy Extension Definition Linkbase Document
(101.LAB) XBRL Taxonomy Extension Label Linkbase Document
(101.PRE) XBRL Taxonomy Extension Presentation Linkbase Document
* Management contract or compensatory plan or arrangement.
87
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
February 27, 2012
February 27, 2012
PENN VIRGINIA CORPORATION
By:
By:
/s/ STEVEN A. HARTMAN
Steven A. Hartman
Senior Vice President and Chief Financial Officer
/s/ Joan C. Sonnen
Joan C. Sonnen
Vice President and Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
Chairman of the Board and Director
February 27, 2012
/s/ EDWARD B. CLOUES, II
Edward B. Cloues, II
/s/ JOHN U. CLARKE
John U. Clarke
/s/ ROBERT GARRETT
Robert Garrett
/s/ STEVEN W. KRABLIN
Steven W. Krablin
/s/ MARSHA R. PERELMAN
Marsha R. Perelman
Director
Director
Director
Director
/s/ PHILIPPE VAN MARCKE DE LUMMEN
Philippe van Marcke de Lummen
Director
February 27, 2012
February 27, 2012
February 27, 2012
February 27, 2012
February 27, 2012
/s/ H. BAIRD WHITEHEAD
H. Baird Whitehead
/s/ GARY K. WRIGHT
Gary K. Wright
Director and President and Chief Executive Officer
February 27, 2012
Director
February 27, 2012
88
AMENDMENT 2009-1
TO THE
PENN VIRGINIA CORPORATION
SUPPLEMENTAL EMPLOYEE RETIREMENT PLAN
Exhibit 10.4.1
Penn Virginia Corporation (the “Company”) wishes to amend the Penn Virginia Corporation Supplemental Employee Retirement
Plan, as amended and restated effective January 1, 2008 (the “Plan”) to clarify the definition of “Eligible Employee” thereunder and to add
in-service distributions payable in annual installments for up to five years. Therefore, pursuant to the power reserved to it in Section 6.1 of
the Plan, the Company amends the Plan, effective January 1, 2010, as follows:
1. Section 1.16 of the Plan is hereby deleted and replaced to read in its entirety as follows:
“1.16. “Eligible Employee” means any individual employed by the Company on a regular basis (in accordance with the personnel
policies and practices of the Company) designated by the Committee as an executive or highly compensated employee eligible to
participate in the Plan; provided that no employee shall become or remain a Participant if the Committee determines that such
employee is not a member of “a select group of management or highly compensated employees” within the meaning of Sections
201(2), 301(a)(3) and 401(a)(1) of ERISA.”
2. Section 4.3.1. of the Plan is hereby deleted and replaced to read in its entirety as follows:
“4.3.1. Prospective Election. A Participant may withdraw all or any portion of the Value of the portion of his or her
Accounts attributable to Grandfathered Amounts during a Plan Year, provided he or she has submitted an election form
requesting the withdrawal to the Committee no later than the December 15 of the Plan Year preceding the year of intended
withdrawal (the “Election Date”). The election form shall be irrevocable as of the applicable Election Date and, to be valid,
must specify (i) the percentage of the portion of Participant’s Accounts attributable to Grandfathered Amounts he or she
elects to withdraw, and (ii) the date the withdrawal shall be made, which shall in no event be earlier than March 1 of the
Plan Year following the Election Date.
A Participant may elect to receive a distribution with respect to all or any portion of the Value of the portion of his or her
Deferral Contribution Accounts attributable to non-Grandfathered Amounts in accordance with the Participant’s
irrevocable in-service distribution election made at the time of the Participant’s deferral election under Section 2.2 on such
terms and conditions as the Committee may require; provided that, the (i) dollar amount subject to the in-service
distribution election must be at least $1,000 and (ii) Participant must indicate the date the distribution shall be made (or
commence), which date shall occur no earlier than January 1 of the second calendar year following the calendar year for
which the deferral election is made and (iii) Participant must choose between distribution in a lump sum or in two (2) to
five (5) annual installments. With respect to in-service distribution elections made with respect to the portion of a
Participant’s Account attributable to non-Grandfathered Amounts in accordance with the preceding sentence, a Participant
may be permitted to file an amendment to defer further the receipt of the portion of his Account attributable to non-
Grandfathered Amounts beyond the original in-service distribution date or dates elected by the Participant at the time of
the Participant’s deferral election under Section 2.2; provided that, such amendment (a) must provide for a payout under
this Section at a date at least sixty (60) months after the first scheduled payment date under the applicable in-service
distribution election in force immediately prior to the filing of such an amendment, (b) must be filed with the Committee at
least twelve (12) months prior to the date on which the first scheduled payment was to occur under the applicable election
then in force and (c) may not take effect until at least twelve (12) months after the date on which the election is made. Any
such election change with respect to an in-service distribution election applicable to the portion of a Participant’s Account
attributable to non-Grandfathered Amounts shall be made in accordance with the requirements of section 409A of the Code
and the regulations thereunder and no subsequent election may result in an impermissible acceleration of payment as
described in section 409A of the Code and the regulations thereunder.
If a Participant has elected an in-service distribution with respect to all or a portion of the portion of the Participant’s
Accounts attributable to non-Grandfathered Amounts pursuant to this Section 4.3 and the Participant terminates
employment with the Sponsor and all of its Affiliates for any reason other than death or a Change of Control occurs, in
either case, prior to the occurrence of the last scheduled in-service distribution payment date elected by the Participant, the
remainder in the Participant’s Accounts shall be distributed to the Participant in accordance with Section 4.1.”
To record the adoption of this Amendment 2009-1 to the Plan, the Company has caused its authorized officers to affix its
corporate name and seal as of this 24th day of October 2009.
[CORPORATE SEAL]
PENN VIRGINIA CORPORATION
Attest: /s/ Nancy M. Snyder
By: /s/ Patrick J. Udovich
Nancy M. Snyder
Patrick J. Udovich
Vice President, Human Resources
PENN VIRGINIA CORPORATION
AMENDED AND RESTATED
EMPLOYEE CHANGE OF CONTROL SEVERANCE AGREEMENT
Exhibit 10.11
This Amended and Restated Employee Change of Control Severance Agreement (“Agreement”) between Penn Virginia
Corporation, a Virginia corporation (the “Company”), and John A. Brooks (“Employee”) is made and entered into effective as of October
26, 2011 (the “Effective Date”).
WHEREAS, Employee is a key employee of the Company; and
WHEREAS, the Company and Employee previously entered into that certain Amended and Restated Employee Change of
Control Severance Agreement dated October 17, 2008 (the “Prior Agreement”); and
WHEREAS, the Company and Employee desire to amend and restate the Prior Agreement to increase Employee’s change of
control severance benefits; and
WHEREAS, the Board of Directors of the Company (the “Board”) has authorized and directed the Company to enter into this
Agreement;
THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company
and Employee agree as follows:
1.
Term of Agreement.
A.
B.
C.
The term of this Agreement (the “Term”) shall commence on the Effective Date and shall continue in effect
through the first anniversary of the Effective Date; provided, however, that commencing on the first day following
the Effective Date and on each day thereafter, the Term of this Agreement shall automatically be extended for one
additional day unless the Company shall give written notice to Employee that the Term shall cease to be so
extended, in which event this Agreement shall terminate on the first anniversary of the date such notice is given.
Notwithstanding anything in this Agreement to the contrary, if a Change of Control occurs during the Term of this
Agreement, the Term shall automatically be extended until, and shall terminate on, the 12-month anniversary of
the date of the Change of Control.
Termination of this Agreement shall not alter or impair any rights of Employee arising hereunder on or before
such termination.
2.
Certain Definitions.
A.
B.
C.
“Affiliate” shall mean, with respect to any Person, any other Person that directly or indirectly through one or more
intermediaries controls, is controlled by or is under common control with, the Person in question. As used herein,
the term “control” means the possession, direct or indirect, of the power to direct or cause the direction of the
management and policies of a Person, whether through ownership of voting securities, by contract or otherwise.
“Bonus” shall mean an amount equal to the highest annual cash bonus paid or payable to Employee by the
Company during the two-year period prior to Employee’s termination of employment.
“Cause” shall mean (i) the willful and continued failure by Employee to substantially perform Employee’s duties
with the Company or any Affiliate (other than any such failure resulting from Employee’s incapacity due to
physical or mental illness), (ii) Employee is convicted of a felony, (iii) Employee willfully engages in gross
misconduct materially and demonstrably injurious to the Company or any Affiliate or (iv) Employee commits one
or more significant acts of dishonesty as regards the Company or any Affiliate. For purposes of clause (i) of this
definition, no act, or failure to act, on Employee’s part shall be deemed “willful” unless done, or omitted to be
done, by Employee not in good faith and without reasonable belief that Employee’s act, or failure to act, was in
the best interest of the Company.
D.
“Change of Control” shall mean the occurrence of any of the following:
(i)
(ii)
any Person or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act
of 1934, as amended (the “Exchange Act”)), other than a trustee or other fiduciary holding securities
under an employee benefit plan of the Company, becomes the “beneficial owner” (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 25% or
more of the combined voting power of the Company’s then outstanding voting securities;
during any period of two consecutive years, individuals who at the beginning of such period constitute
the Board, and any new director (other than a director designated by a person who has entered into an
agreement with the Company to effect a transaction described in clause (i), (iii) or (v) of this Change of
Control definition and excluding any individual whose initial assumption of office occurs as a result of
either (a) an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation
14A promulgated under the Exchange Act) or (b) an actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the Board) whose election by the Board or nomination
for election by the Company’s shareholders was approved by a vote of at least two-thirds of the directors
then still in office who either were directors at the beginning of the period or whose election or
nomination for election was previously so approved, cease for any reason (other than retirement) to
constitute at least a majority thereof;
2
(iii)
the shareholders of the Company approve the consummation of a merger or consolidation of the
Company with any other corporation, other than a merger or consolidation which would result in the
voting securities of the Company outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the surviving entity) at least 75%
of the combined voting power of the voting securities of the Company (or such surviving entity or parent
entity, as the case may be) outstanding immediately after such merger or consolidation;
(iv)
the shareholders of the Company approve a plan of complete liquidation of the Company; or
(v)
the sale or disposition by the Company of all or substantially all of the assets of the Company.
E.
F.
G.
“Person” shall mean an individual or a corporation, limited liability company, partnership, joint venture, trust,
unincorporated organization, association, government agency or political subdivision thereof or other entity.
“Protected Period” shall mean the 12-month period beginning on the effective date of a Change of Control.
“Termination Base Salary” shall mean that amount equal to Employee’s annual base salary with the Company at
the rate in effect immediately prior to the Change of Control or, if a greater amount, Employee’s annual base
salary at the rate in effect at any time thereafter.
3.
Change of Control Severance Benefits.
If the Company terminates Employee’s employment during the Protected Period other than (i) for Cause or (ii) due to
Employee’s inability to perform the primary duties of his position for at least 180 consecutive days due to a physical or
mental impairment, Employee shall receive the following compensation and benefits from the Company subject to the
execution (and non-revocation within eight days thereafter) and delivery to the Company of a release, substantially in the
form attached as Exhibit A hereto, with such changes as the Company reasonably determines must be made to comply with
applicable law at the time of such execution (the “Release”):
3
A.
B.
C.
The Company shall, at the time provided in Section 3E, pay to Employee in a lump sum, in cash, an amount equal
to two times the sum of Employee’s (i) Termination Base Salary and (ii) Bonus.
Except to the extent any awards related to Company stock have already vested or become exercisable, as the case
may be, under the Company’s Seventh Amended and Restated 1999 Employee Stock Incentive Plan (the “Plan”),
or under any successor or other similar plan, as of the date of Employee’s termination of employment (i) all
restricted shares of Company stock shall become 100% vested and all restrictions thereon shall lapse and the
Company shall promptly deliver to Employee unrestricted shares of Company stock, (ii) all Company restricted
stock units of Employee shall become 100% vested and all restrictions thereon shall lapse and the Company shall
promptly deliver to Employee cash or unrestricted shares of Company stock and (iii) each outstanding Company
stock option of Employee shall become 100% exercisable and shall, notwithstanding anything stated to the
contrary in the Plan, any successor or other similar plan or any option agreement related thereto, remain
exercisable for the remainder of such option’s term or three years, whichever is less. To the extent payment with
respect to any restricted stock or restricted stock unit award under clause (i) or clause (ii) above constitutes a
payment event for purposes of section 409A of the Internal Revenue Code of 1986, as Amended, (the “Code”),
payment shall be made at the time specified hereunder only if the transaction constituting a Change of Control is a
“change in control event” within the meaning given such term under section 409A of the Code and the regulations
thereunder. If the transaction constituting a Change of Control is not a “change in control event” within the
meaning given such term under section 409A of the Code and the regulations thereunder, payment with respect to
any restricted or phantom unit award under clause (i) or clause (ii) above shall be made at such time or times as
set forth in the Plan, or any successor or other similar plan or any grant agreement related thereto.
Within one week following the eighth day after the execution (without revocation) of the Release, the Company
shall provide to Employee a release substantially in the form attached hereto as Exhibit B, with such changes as
the Company reasonably determines must be made to comply with applicable law at the time of such execution. If
the Company does not provide the release required pursuant to this subsection C, the Release shall be null, void
and without effect, and Employee shall still receive all of the payments and benefits described in subsections A
and B above.
4
D.
E.
The Company may withhold from any amounts or benefits payable under this Agreement all such amounts as it
shall be required to withhold pursuant to any applicable law or regulation.
Payment of the amounts described in subsections A and B above shall be made within 30 days of Employee’s date
of termination (provided that the Release has been executed and has not been revoked) and shall be made by mail
to the last address provided for notices to Employee pursuant to Section 9 of this Agreement. Any payment not
timely made by the Company under this Agreement shall bear interest at 18% per annum or, if less, at the highest
nonusurious rate permitted by applicable law.
This Agreement shall be interpreted to avoid any penalty sanctions under section 409A of the Code. If any payment or
benefit cannot be provided or made at the time specified herein without incurring sanctions under section 409A of the
Code, then such benefit or payment shall be provided in full at the earliest time thereafter when such sanctions will not be
imposed. For purposes of section 409A of the Code, all payments to be made upon a termination of employment under this
Agreement may only be made upon a “separation from service” within the meaning of such term under section 409A of the
Code and each payment under this Agreement shall be treated as a separate payment. All reimbursements and in-kind
benefits provided under this Agreement shall be made or provided in accordance with the requirements of section 409A of
the Code, including, where applicable, the requirement that (i) any reimbursement shall be for expenses incurred during
Employee’s lifetime (or during a shorter period of time specified in this Agreement), (ii) the amount of expenses eligible
for reimbursement, or in-kind benefits provided, during a calendar year may not affect the expenses eligible for
reimbursement, or in-kind benefits to be provided, in any other calendar year, (iii) the reimbursement of an eligible
expense will be made on or before the last day of the calendar year following the year in which the expense is incurred and
(iv) the right to reimbursement or in-kind benefits is not subject to liquidation or exchange for another benefit.
Notwithstanding any provision of this Agreement to the contrary, if, at the time of Employee’s “separation from service”
with the Company, the Company has securities which are publicly traded on an established securities market and Employee
is a “specified employee” (as defined in section 409A of the Code) and it is necessary to postpone the commencement of
any compensation payments or benefits otherwise payable pursuant to this Agreement as a result of such “separation from
service” to prevent any accelerated or additional tax under section 409A of the Code, then the Company will postpone the
commencement of the payment of any such compensation payments or benefits hereunder (without any reduction in such
payments or benefits ultimately paid or provided to Employee) that are not otherwise paid within the “short-term deferral
exception” under Treas. Reg. section 1.409A-1(b)(4) and the “separation pay exception” under Treas. Reg. section 1.409A-
1(b)(9)(iii), until the first payroll date that occurs after the date that is six months following Employee’s “separation from
service” with the Company. If any payments are postponed due to such requirements, such amounts will be paid in a lump
sum to Employee on the first payroll date that occurs after the date that is six months following Employee’s “separation
from service” with the Company. If Employee dies during the postponement period prior to the payment of the postponed
amount, the amounts postponed on account of section 409A of the Code shall be paid to the personal representative of
Employee’s estate within 60 days after the date of Employee’s death. In no event shall Employee, directly or indirectly,
designate the calendar year of payment.
5
4.
Restrictive Covenants.
A.
Confidential Information. Employee recognizes and acknowledges that, by reason of his employment by and
service to the Company, he has had and will continue to have access to confidential information of the Company
and its Affiliates, including, without limitation, analyses, interpretations, compilations, reports, reservoir data,
geologic and geophysical data, maps, models, financial data, environmental data, information and knowledge
pertaining to products and services offered, plans, trade secrets, proprietary information, customer lists and
relationships among the Company and its Affiliates and distributors, customers, suppliers and others who have
business dealings with the Company and its Affiliates (“Confidential Information”). Employee acknowledges that
such Confidential Information is a valuable and unique asset and covenants that he will not, either during or after
his employment by the Company, disclose any such Confidential Information to any Person for any reason
whatsoever without the prior written consent of the Board, unless such information is in the public domain
through no fault of Employee or except as may be required by law.
B.
Non-Solicitation. Employee shall not, directly or indirectly, during his employment by the Company and for a
period of two years thereafter, solicit or divert business from, or attempt to convert any account or customer of the
Company or any of its Affiliates, whether existing at the date hereof or acquired during Employee’s employment.
5.
Equitable Relief.
A.
Employee acknowledges that the restrictions contained in Section 4 hereof are reasonable and necessary to protect
the legitimate interests of the Company and its Affiliates, that the Company would not have entered into this
Agreement in the absence of such restrictions and that any violation of any provision of those Sections will result
in irreparable injury to the Company. Employee further represents and acknowledges that (i) he has been advised
by the Company to consult his own legal counsel in respect of this Agreement and (ii) he has had full opportunity,
prior to execution of this Agreement, to review thoroughly this Agreement with his counsel.
6
B.
C.
Employee agrees that the Company or any Affiliate shall be entitled to preliminary and permanent injunctive
relief, without the necessity of proving actual damages or posting a bond, as well as to an equitable accounting of
all earnings, profits and other benefits arising from any violation of Section 4 hereof, which rights shall be
cumulative and in addition to any other rights or remedies to which the Company or any Affiliate may be entitled.
In the event that any of the provisions of Section 4 hereof should ever be adjudicated to exceed any limitations
permitted by applicable law in any jurisdiction, then such provisions shall be deemed reformed in such jurisdiction
to the maximum limitations permitted by applicable law.
Employee irrevocably and unconditionally (i) agrees that any suit, action or other legal proceeding arising out of
Section 4 hereof, including without limitation, any action commenced by the Company or any Affiliate for
preliminary and permanent injunctive relief or other equitable relief, may be brought in the United States District
Court for the Eastern District of Pennsylvania, or if such court does not have jurisdiction or will not accept
jurisdiction, in any court of general jurisdiction in Philadelphia, Pennsylvania, (ii) consents to the non-exclusive
jurisdiction of any such court in any such suit, action or proceeding and (iii) waives any objection which
Employee may have to the laying of venue of any such suit, action or proceeding in any such court. Employee
also irrevocably and unconditionally consents to the service of any process, pleadings, notices or other papers in a
manner permitted by the notice provisions of Section 9 hereof. In the event of a lawsuit by either party to enforce
the provisions of Section 4 of this Agreement, the prevailing party shall be entitled to recover reasonable costs,
expenses and attorneys’ fees from the other party.
6.
No Mitigation.
Employee shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other
employment or otherwise nor shall the amount of any payment or benefit provided for in this Agreement be reduced as the
result of employment by another employer or self-employment or offset against any amount claimed to be owed by
Employee to the Company or otherwise, except that Employee shall waive, in a manner acceptable to the Company in its
reasonable judgment, all rights to receive any severance payments or benefits that Employee is entitled to receive pursuant
to any other Company severance plan or program.
7.
Successor Agreement.
The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business and/or assets of the Company to, and each successor shall, assume expressly in
writing prior to the effective date of such succession and agree to perform this Agreement in the same manner and to the
same extent that the Company would be required to perform if no succession had taken place. Failure of the successor to so
assume as provided herein shall constitute a breach of this Agreement and entitle Employee to the payments and benefits
hereunder as if triggered by a termination of Employee by the Company other than for Cause on the date of such
succession.
7
8.
Indemnity.
In any situation where under applicable law the Company has the power to indemnify, advance expenses to and defend
Employee in respect of any judgments, fines, settlements, losses, costs or expenses (including attorneys’ fees) of any nature
related to or arising out of Employee’s activities as an agent, employee, officer or director of the Company or any Affiliate
or in any other capacity on behalf of or at the request of the Company or any Affiliate, then the Company or any Affiliate
shall promptly on written request, fully indemnify Employee, advance expenses (including attorneys’ fees) to Employee
and defend Employee to the fullest extent permitted by applicable law, including but not limited to making such findings
and determinations and taking any and all such actions as the Company or any Affiliate may, under applicable law, be
permitted to take so as to effectuate such indemnification, advancement or defense. Such agreement by the Company shall
not be deemed to impair any other obligation of the Company respecting Employee’s indemnification or defense otherwise
arising out of this or any other agreement or promise of the Company under any statute.
9.
Notices.
All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party
or by registered or certified mail, return receipt requested, postage prepaid, addressed as set forth below or to such other
address as either party shall have furnished to the other in writing in accordance herewith. Notices and communications
shall be effective when actually received by the addressee.
If to the Company:
Four Radnor Corporate Center
Suite 200
100 Matsonford Road
Radnor, Pennsylvania 19087
If to Employee:
The address included in the Company’s records for purposes of delivering Employee’s Form W-2s.
8
10.
Arbitration.
Any dispute about the validity, interpretation, effect or alleged violation of this Agreement, other than with respect to
Section 4 or 5 (an “arbitrable dispute”), must be submitted to confidential arbitration in Philadelphia, Pennsylvania.
Arbitration shall take place before an experienced employment arbitrator licensed to practice law in such state and selected
in accordance with the Model Employment Arbitration Procedures of the American Arbitration Association. Arbitration
shall be the exclusive remedy of any arbitrable dispute. The Company shall bear all fees, costs and expenses of arbitration,
including its own, those of the arbitrator and those of Employee unless the arbitrator provides otherwise with respect to the
fees, costs and expenses of Employee; in no event shall Employee be chargeable with the fees, costs and expenses of the
Company or the arbitrator. The Company shall advance to Employee all expenses incurred by Employee in connection
with an arbitrable dispute and, if the arbitrator determines that Employee is the losing party in such dispute, Employee
shall reimburse such expenses to the Company unless the arbitrator provides otherwise. Should any party to this
Agreement pursue any arbitrable dispute by any method other than arbitration, the other party shall be entitled to recover
from the party initiating the use of such method all damages, costs, expenses and attorneys’ fees incurred as a result of the
use of such method. Notwithstanding anything herein to the contrary, nothing in this Agreement shall purport to waive or
in any way limit the right of any party to seek to enforce any judgment or decision on an arbitrable dispute in a court of
competent jurisdiction. Each party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts in
Philadelphia, Pennsylvania for the purposes of any proceeding arising out of this Agreement.
11.
Governing Law.
This Agreement will be governed by and construed in accordance with the laws of the Commonwealth of Virginia without
regard to conflicts of law principles.
12.
Entire Agreement.
This Agreement is an integration of the parties’ agreement and no agreements or representations, oral or otherwise, express
or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this
Agreement.
13.
Severability.
The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any
other provision of this Agreement, which shall remain in full force and effect.
9
14.
Amendment and Waivers.
No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is
(a) agreed to in writing and signed by Employee and the Company and (b) approved by the Chairperson of the Company’s
Compensation and Benefits Committee. No waiver by either party hereto at any time of any breach by the other party
hereto of, or of compliance with, any condition or provision of this Agreement to be performed by such other party shall be
deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time.
[Signature Page Follows]
10
IN WITNESS WHEREOF, the Company and Employee have executed this Agreement effective for all purposes as of the
Effective Date.
PENN VIRGINIA CORPORATION
By:
/s/ Nancy M. Snyder
Name: Nancy M. Snyder
Title: Executive Vice President and Chief Administrative Officer
EMPLOYEE
/s/ John A. Brooks
John A. Brooks
RELEASE OF EMPLOYER
Exhibit A
THIS RELEASE, made and entered into on this ______ day of __________, 20_, by __________________________, of
____________________________ (“Employee”).
WITNESSETH:
WHEREAS, Penn Virginia Corporation (hereinafter “Employer”) currently employs Employee as its
___________________________, but Employee’s employment [will terminate/has terminated] effective as of _______________, 20__;
and
WHEREAS, Employer and Employee have entered into an Employee Change of Control Severance Agreement dated as of
_______________, 20__ (the “Severance Agreement”) in connection with the termination of Employee’s employment;
NOW, THEREFORE, for the consideration described herein, Employee, intending to be legally bound, hereby agrees as follows:
1. For and in consideration of (a) the benefits to be paid to Employee under the Severance Agreement and (b) the Release executed
b y Employer pursuant to Section 3.C. of the Severance Agreement (the “Employee Release”), Employee does hereby REMISE,
RELEASE, AND FOREVER DISCHARGE Employer and each of its subsidiaries and affiliates, and each of their respective officers,
directors, shareholders, unitholders, partners, employees and agents and their respective successors and assigns, heirs, executors and
administrators (hereinafter in this paragraph collectively referred to as “Employer”), acting in any capacity whatsoever, of and from any and
all manner of actions and causes of actions, suits, debts, claims and demands whatsoever in law or in equity, which he ever had, now has, or
hereafter may have, or which his heirs, executors or administrators hereafter may have, by reason of any matter, cause or thing whatsoever
from the beginning of time to the date of this Release including and arising from or relating in any way to his employment relationship or
the termination of that employment relationship with Employer, including but not limited to, any claims which have been asserted, could
have been asserted, or could be asserted now or in the future under any federal, state or local laws, including any claims under the Age
Discrimination in Employment Act (“ADEA”), 29 U.S.C. §621 et seq., Title VII of the Civil Rights Act of 1964, 42 U.S.C. §2000e et seq.,
the Pennsylvania Human Relations Act, the Employee Retirement Income Security Act of 1974, as amended, any contracts between
Employer and Employee, any common law claims now or hereafter recognized and all claims for counsel fees and costs. Employee
expressly waives all rights afforded by any statute or otherwise which expressly limit the effect of a release with respect to unknown claims.
Employee acknowledges the significance of this release of unknown claims and the waiver of any protection against a release of unknown
claims. Notwithstanding the foregoing, Employee shall be entitled to enforce the terms of the Employee Release and any employee benefit
plan of Employer in which Employee is, on the date of this Release, due a benefit, and to be indemnified by Employer as to any liability,
cost or expense for which Employee would have been indemnified during employment, in accordance with the bylaws of Employer, for
actions taken on behalf of Employer within the scope of his employment by Employer.
12
2. Employee further agrees, covenants and promises that he will not in any way communicate the terms of this Release to any
person other than his immediate family, his attorney and his financial consultant or when necessary to enforce this Release or to advise a
third party of his obligations under this Release. Employee agrees not to disparage the name, business reputation or business practices of
Employer, or any of its subsidiaries or affiliates, or their respective officers, employees and directors.
3. Employee certifies he has read the terms of this Release and specifically the release in Section 1, that he has the opportunity to
discuss this Release with his attorney, and that he understands the terms and effects of this Release. Employee acknowledges, further, that
he is executing this Release of his own volition, with a full understanding of the terms and effects thereof and with the intention of releasing
all claims recited herein in exchange for the consideration described above, which he acknowledges is adequate and satisfactory. No
representations have been made to Employee concerning the terms or effects of this Release, other than those contained herein.
4. Employee hereby acknowledges that he has the right to consider this Release and the release in Section 1 for a period of 21 days
prior to execution. Employee also understands that he has the right to revoke this Release for a period of seven days following execution by
giving written notice to Penn Virginia Corporation, Attention: General Counsel, Four Radnor Corporate Center, Suite 200, 100 Matsonford
Road, Radnor, PA 19087, in which event the provisions of this Release shall be null and void, and Employer and Employee shall each have
the rights, duties, obligations and remedies afforded by applicable law.
5. Employee further acknowledges and agrees that if he materially violates any of his obligations or covenants set forth in this
Release (and has not cured such violation within 10 days of receiving written notice of such violation from Employer), he will forfeit all
payments made to him under the Severance Agreement and any and all future payments and benefits thereunder, hereunder and under the
Employee Release shall immediately terminate as of the violation.
6. The invalidity or unenforceability of any provision of this Release shall not affect the validity or enforceability of any other
provision of this Release, which shall remain in full force and effect.
13
7. This Release shall be interpreted and enforced under the laws of the Commonwealth of Pennsylvania. This Release shall be
binding and shall inure to the benefit of Employer’s permitted successors and assigns.
IN WITNESS WHEREOF, Employee executed this Release on the day and year first above written.
ATTEST:
Witness
Employee
THIS RELEASE, made and entered into on this ______ day of __________, 200_, by PENN VIRGINIA CORPORATION
(hereinafter “Employer”), with its principal office at Four Radnor Corporate Center, Suite 200, 100 Matsonford Road, Radnor, PA 19087.
RELEASE OF EMPLOYEE
Exhibit B
WITNESSETH:
WHEREAS, Employer currently employs ____________________ (“Employee” as its ___________________________, but
Employee’s employment [will terminate/has terminated] effective as of _______________, 200__; and
WHEREAS, Employer and Employee have entered into an Employee Change of Control Severance Agreement dated as of
_______________, 200__ (the “Severance Agreement”) in connection with the termination of Employee’s employment;
NOW, THEREFORE, for the consideration described herein, Employer, intending to be legally bound, hereby agrees as follows:
1. In consideration of the Release executed by Employee pursuant to Section 3 of the Severance Agreement (the “Employer
Release”), but effective only upon such Employer Release becoming irrevocable, Employer, and on behalf of each of its parent, subsidiaries
and affiliates, each of their respective officers, directors shareholders and unitholders, and their respective successors and assigns, heirs,
executors and administrators (hereinafter collectively included within the term "Employer"), does hereby REMISE, RELEASE, AND
FOREVER DISCHARGE Employee, his assigns, heirs, executors and administrators (hereinafter collectively included within the term
"Employee"), acting in any capacity whatsoever, of and from any and all manner of actions and causes of actions, suits, debts, claims and
demands whatsoever in law or in equity, which it ever had, now has, or hereafter may have, by reason of any matter, cause or thing
whatsoever from the beginning of Employee's employment with Employer to the date of this Release arising from or relating in any way to
Employee's employment relationship or the termination of his employment relationship with Employer, including but not limited to, any
claims which have been asserted, could have been asserted, or could be asserted now or in the future under any federal, state or local laws,
any contracts between Employer and Employee, any common law claims now or hereafter recognized and all claims for counsel fees and
costs, but in no event shall this Release apply to an act of fraud or any action outside the scope of Employee's employment nor to
Employer’s enforcement of the terms of the Employer Release.
2. Employer certifies it has read the terms of this Release and specifically the release in Section 1, that it has the opportunity to
discuss this Release with its attorney, and that it understands the terms and effects of this Release. Employer acknowledges, further, that it
is executing this Release of its own volition, with a full understanding of the terms and effects thereof and with the intention of releasing all
claims recited herein in exchange for the consideration described above, which it acknowledges is adequate and satisfactory. No
representations have been made to Employer concerning the terms or effects of this Release, other than those contained herein.
2
3. The invalidity or unenforceability of any provision of this Release shall not affect the validity or enforceability of any other
provision of this Release, which shall remain in full force and effect.
4. This Release shall be interpreted and enforced under the laws of the
Commonwealth of Pennsylvania. This Release shall be binding and shall inure to the benefit of Employer’s permitted successors and
assigns.
IN WITNESS WHEREOF, Employer executed this Release on the day and year first above written.
ATTEST:
PENN VIRGINIA CORPORATION
By:
Name:
Title:
3
PENN VIRGINIA CORPORATION
AMENDED AND RESTATED
EMPLOYEE CHANGE OF CONTROL SEVERANCE AGREEMENT
Exhibit 10.12
This Amended and Restated Employee Change of Control Severance Agreement (“Agreement”) between Penn Virginia
Corporation, a Virginia corporation (the “Company”), and Michael E. Stamper (“Employee”) is made and entered into effective as of
October 17, 2008 (the “Effective Date”).
WHEREAS, Employee is a key employee of the Company; and
WHEREAS, the Company and Employee previously entered into that certain Employee Change of Control Severance Agreement
dated February 28, 2006 (the “Prior Agreement”); and
WHEREAS, the Company and Employee desire to amend and restate the Prior Agreement to comply with section 409A of the
Internal Revenue Code, as amended, and the regulations promulgated thereunder (the “Code”); and
WHEREAS, the Board of Directors of the Company (the “Board”) has authorized and directed the Company to enter into this
Agreement;
THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Company
and Employee agree as follows:
1.
Term of Agreement.
A.
B.
C.
The term of this Agreement (the “Term”) shall commence on the Effective Date and shall continue in effect
through the first anniversary of the Effective Date; provided, however, that commencing on the first day following
the Effective Date and on each day thereafter, the Term of this Agreement shall automatically be extended for one
additional day unless the Company shall give written notice to Employee that the Term shall cease to be so
extended, in which event this Agreement shall terminate on the first anniversary of the date such notice is given.
Notwithstanding anything in this Agreement to the contrary, if a Change of Control occurs during the Term of this
Agreement, the Term shall automatically be extended until, and shall terminate on, the 12-month anniversary of
the date of the Change of Control.
Termination of this Agreement shall not alter or impair any rights of Employee arising hereunder on or before
such termination.
2.
Certain Definitions.
A.
B.
“Affiliate” shall mean, with respect to any Person, any other Person that directly or indirectly through one or more
intermediaries controls, is controlled by or is under common control with, the Person in question. As used herein,
the term “control” means the possession, direct or indirect, of the power to direct or cause the direction of the
management and policies of a Person, whether through ownership of voting securities, by contract or otherwise.
“Cause” shall mean (i) the willful and continued failure by Employee to substantially perform Employee’s duties
with the Company or any Affiliate (other than any such failure resulting from Employee’s incapacity due to
physical or mental illness), (ii) Employee is convicted of a felony, (iii) Employee willfully engages in gross
misconduct materially and demonstrably injurious to the Company or any Affiliate or (iv) Employee commits one
or more significant acts of dishonesty as regards the Company or any Affiliate. For purposes of clause (i) of this
definition, no act, or failure to act, on Employee’s part shall be deemed “willful” unless done, or omitted to be
done, by Employee not in good faith and without reasonable belief that Employee’s act, or failure to act, was in
the best interest of the Company.
C.
“Change of Control” shall mean the occurrence of any of the following:
(i)
(ii)
any Person or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act
of 1934, as amended (the “Exchange Act”)), other than a trustee or other fiduciary holding securities
under an employee benefit plan of the Company, becomes the “beneficial owner” (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 25% or
more of the combined voting power of the Company’s then outstanding voting securities;
during any period of two consecutive years (not including any period prior to the effective date of the
Prior Agreement), individuals who at the beginning of such period constitute the Board, and any new
director (other than a director designated by a person who has entered into an agreement with the
Company to effect a transaction described in clause (i), (iii) or (v) of this Change of Control definition
and excluding any individual whose initial assumption of office occurs as a result of either (a) an actual
or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated
under the Exchange Act) or (b) an actual or threatened solicitation of proxies or consents by or on behalf
of a Person other than the Board) whose election by the Board or nomination for election by the
Company’s shareholders was approved by a vote of at least two-thirds of the directors then still in office
who either were directors at the beginning of the period or whose election or nomination for election was
previously so approved, cease for any reason (other than retirement) to constitute at least a majority
thereof;
2
(iii)
the shareholders of the Company approve the consummation of a merger or consolidation of the
Company with any other corporation, other than a merger or consolidation which would result in the
voting securities of the Company outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the surviving entity) at least 75%
of the combined voting power of the voting securities of the Company (or such surviving entity or parent
entity, as the case may be) outstanding immediately after such merger or consolidation;
(iv)
the shareholders of the Company approve a plan of complete liquidation of the Company; or
(v)
the sale or disposition by the Company of all or substantially all of the assets of the Company, it being
acknowledged for purposes of clarity that the sale or disposition by the Company of all or substantially
all of its interest in PVG GP, LLC, a Delaware limited liability company, Penn Virginia GP Holdings,
L.P., a Delaware limited partnership (“PVG”), Penn Virginia Resource GP, LLC, a Delaware limited
liability company, or Penn Virginia Resource Partners, L.P., a Delaware limited partnership (“PVR”),
does not constitute a sale or disposition of all or substantially all of the assets of the Company.
“Person” shall mean an individual or a corporation, limited liability company, partnership, joint venture, trust,
unincorporated organization, association, government agency or political subdivision thereof or other entity.
“Protected Period” shall mean the 12-month period beginning on the effective date of a Change of Control.
“Termination Base Salary” shall mean that amount equal to Employee’s annual base salary with the Company at
the rate in effect immediately prior to the Change of Control or, if a greater amount, Employee’s annual base
salary at the rate in effect at any time thereafter.
D.
E.
F.
3.
Change of Control Severance Benefits.
If the Company terminates Employee’s employment during the Protected Period other than (i) for Cause or (ii) due to
Employee’s inability to perform the primary duties of his position for at least 180 consecutive days due to a physical or
mental impairment, Employee shall receive the following compensation and benefits from the Company subject to the
execution (and non-revocation within eight days thereafter) and delivery to the Company of a release, substantially in the
form attached as Exhibit A hereto, with such changes as the Company reasonably determines must be made to comply with
applicable law at the time of such execution (the “Release”):
3
A.
B.
The Company shall, at the time provided in Section 3E, pay to Employee in a lump sum, in cash, an amount equal
to Employee’s Termination Base Salary.
Except to the extent any awards related to Company stock, PVG common units or PVR common units have
already vested or become exercisable, as the case may be, under the Company’s Fifth Amended and Restated
1999 Employee Stock Incentive Plan (the “Plan”), the PVG GP, LLC Amended and Restated Long-Term
Incentive Plan (the “PVG LTIP”) or the Penn Virginia Resource GP, LLC Fourth Amended and Restated Long-
Term Incentive Plan (the “PVR LTIP”), or under any successor or other similar plan, as of the date of Employee’s
termination of employment (i) all restricted shares of Company stock, all restricted PVG units and all restricted
PVR units of Employee shall become 100% vested and all restrictions thereon shall lapse and the Company, PVG
and PVR shall promptly deliver to Employee unrestricted shares of Company stock, unrestricted PVG common
units and unrestricted PVR common units, (ii) all Company restricted stock units, all PVG phantom units and all
PVR phantom units of Employee shall become 100% vested and all restrictions thereon shall lapse and the
Company, PVG and PVR shall promptly deliver to Employee cash or unrestricted shares of Company stock,
unrestricted PVG common units or unrestricted PVR common units, as applicable, and (iii) each outstanding
Company stock option, PVG unit option and PVR unit option of Employee shall become 100% exercisable and
shall, notwithstanding anything stated to the contrary in the Plan, the PVG LTIP, the PVR LTIP, any successor or
other similar plan or any option agreement related thereto, remain exercisable for the remainder of such option’s
term or three years, whichever is less. To the extent payment with respect to any restricted or phantom unit award
under clause (i) or clause (ii) above constitutes a payment event for purposes of section 409A of the Code,
payment shall be made at the time specified hereunder only if the transaction constituting a Change of Control is a
“change in control event” within the meaning given such term under section 409A of the Code and the regulations
thereunder. If the transaction constituting a Change of Control is not a “change in control event” within the
meaning given such term under section 409A of the Code and the regulations thereunder, payment with respect to
any restricted or phantom unit award under clause (i) or clause (ii) above shall be made at such time or times as
set forth in the Plan, the PVG LTIP or the PVR LTIP, or any successor or other similar plan or any grant
agreement related thereto.
4
C.
D.
E.
Within one week following the eighth day after the execution (without revocation) of the Release, the Company
shall provide to Employee a release substantially in the form attached hereto as Exhibit B, with such changes as
the Company reasonably determines must be made to comply with applicable law at the time of such execution. If
the Company does not provide the release required pursuant to this subsection C, the Release shall be null, void
and without effect, and Employee shall still receive all of the payments and benefits described in subsections A
and B above.
The Company may withhold from any amounts or benefits payable under this Agreement all such amounts as it
shall be required to withhold pursuant to any applicable law or regulation.
Payment of the amounts described in subsections A and B above shall be made within 30 days of Employee’s date
of termination (provided that the Release has been executed and has not been revoked) and shall be made by mail
to the last address provided for notices to Employee pursuant to Section 9 of this Agreement. Any payment not
timely made by the Company under this Agreement shall bear interest at 18% per annum or, if less, at the highest
nonusurious rate permitted by applicable law.
This Agreement shall be interpreted to avoid any penalty sanctions under section 409A of the Code. If any payment or
benefit cannot be provided or made at the time specified herein without incurring sanctions under section 409A of the
Code, then such benefit or payment shall be provided in full at the earliest time thereafter when such sanctions will not be
imposed. For purposes of section 409A of the Code, all payments to be made upon a termination of employment under this
Agreement may only be made upon a “separation from service” within the meaning of such term under section 409A of the
Code and each payment under this Agreement shall be treated as a separate payment. All reimbursements and in-kind
benefits provided under this Agreement shall be made or provided in accordance with the requirements of section 409A of
the Code, including, where applicable, the requirement that (i) any reimbursement shall be for expenses incurred during
Employee’s lifetime (or during a shorter period of time specified in this Agreement), (ii) the amount of expenses eligible
for reimbursement, or in-kind benefits provided, during a calendar year may not affect the expenses eligible for
reimbursement, or in-kind benefits to be provided, in any other calendar year, (iii) the reimbursement of an eligible
expense will be made on or before the last day of the calendar year following the year in which the expense is incurred and
(iv) the right to reimbursement or in-kind benefits is not subject to liquidation or exchange for another benefit.
5
Notwithstanding any provision of this Agreement to the contrary, if, at the time of Employee’s “separation from service”
with the Company, the Company has securities which are publicly traded on an established securities market and Employee
is a “specified employee” (as defined in section 409A of the Code) and it is necessary to postpone the commencement of
any compensation payments or benefits otherwise payable pursuant to this Agreement as a result of such “separation from
service” to prevent any accelerated or additional tax under section 409A of the Code, then the Company will postpone the
commencement of the payment of any such compensation payments or benefits hereunder (without any reduction in such
payments or benefits ultimately paid or provided to Employee) that are not otherwise paid within the “short-term deferral
exception” under Treas. Reg. section 1.409A-1(b)(4) and the “separation pay exception” under Treas. Reg. section 1.409A-
1(b)(9)(iii), until the first payroll date that occurs after the date that is six months following Employee’s “separation from
service” with the Company. If any payments are postponed due to such requirements, such amounts will be paid in a lump
sum to Employee on the first payroll date that occurs after the date that is six months following Employee’s “separation
from service” with the Company. If Employee dies during the postponement period prior to the payment of the postponed
amount, the amounts postponed on account of section 409A of the Code shall be paid to the personal representative of
Employee’s estate within 60 days after the date of Employee’s death. In no event shall Employee, directly or indirectly,
designate the calendar year of payment.
4.
Restrictive Covenants.
A.
Confidential Information. Employee recognizes and acknowledges that, by reason of his employment by and
service to the Company, he has had and will continue to have access to confidential information of the Company
and its Affiliates, including, without limitation, analyses, interpretations, compilations, reports, reservoir data,
geologic and geophysical data, maps, models, financial data, environmental data, information and knowledge
pertaining to products and services offered, plans, trade secrets, proprietary information, customer lists and
relationships among the Company and its Affiliates and distributors, customers, suppliers and others who have
business dealings with the Company and its Affiliates (“Confidential Information”). Employee acknowledges that
such Confidential Information is a valuable and unique asset and covenants that he will not, either during or after
his employment by the Company, disclose any such Confidential Information to any Person for any reason
whatsoever without the prior written consent of the Board, unless such information is in the public domain
through no fault of Employee or except as may be required by law.
B.
Non-Solicitation. Employee shall not, directly or indirectly, during his employment by the Company and for a
period of two years thereafter, solicit or divert business from, or attempt to convert any account or customer of the
Company or any of its Affiliates, whether existing at the date hereof or acquired during Employee’s employment.
6
5.
Equitable Relief.
A.
B.
C.
Employee acknowledges that the restrictions contained in Section 4 hereof are reasonable and necessary to protect
the legitimate interests of the Company and its Affiliates, that the Company would not have entered into this
Agreement in the absence of such restrictions and that any violation of any provision of those Sections will result
in irreparable injury to the Company. Employee further represents and acknowledges that (i) he has been advised
by the Company to consult his own legal counsel in respect of this Agreement and (ii) he has had full opportunity,
prior to execution of this Agreement, to review thoroughly this Agreement with his counsel.
Employee agrees that the Company or any Affiliate shall be entitled to preliminary and permanent injunctive
relief, without the necessity of proving actual damages or posting a bond, as well as to an equitable accounting of
all earnings, profits and other benefits arising from any violation of Section 4 hereof, which rights shall be
cumulative and in addition to any other rights or remedies to which the Company or any Affiliate may be entitled.
In the event that any of the provisions of Section 4 hereof should ever be adjudicated to exceed any limitations
permitted by applicable law in any jurisdiction, then such provisions shall be deemed reformed in such jurisdiction
to the maximum limitations permitted by applicable law.
Employee irrevocably and unconditionally (i) agrees that any suit, action or other legal proceeding arising out of
Section 4 hereof, including without limitation, any action commenced by the Company or any Affiliate for
preliminary and permanent injunctive relief or other equitable relief, may be brought in the United States District
Court for the Eastern District of Pennsylvania, or if such court does not have jurisdiction or will not accept
jurisdiction, in any court of general jurisdiction in Philadelphia, Pennsylvania, (ii) consents to the non-exclusive
jurisdiction of any such court in any such suit, action or proceeding and (iii) waives any objection which
Employee may have to the laying of venue of any such suit, action or proceeding in any such court. Employee
also irrevocably and unconditionally consents to the service of any process, pleadings, notices or other papers in a
manner permitted by the notice provisions of Section 9 hereof. In the event of a lawsuit by either party to enforce
the provisions of Section 4 of this Agreement, the prevailing party shall be entitled to recover reasonable costs,
expenses and attorneys’ fees from the other party.
6.
No Mitigation.
Employee shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other
employment or otherwise nor shall the amount of any payment or benefit provided for in this Agreement be reduced as the
result of employment by another employer or self-employment or offset against any amount claimed to be owed by
Employee to the Company or otherwise, except that Employee shall waive, in a manner acceptable to the Company in its
reasonable judgment, all rights to receive any severance payments or benefits that Employee is entitled to receive pursuant
to any other Company severance plan or program.
7
7.
Successor Agreement.
The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business and/or assets of the Company to, and each successor shall, assume expressly in
writing prior to the effective date of such succession and agree to perform this Agreement in the same manner and to the
same extent that the Company would be required to perform if no succession had taken place. Failure of the successor to so
assume as provided herein shall constitute a breach of this Agreement and entitle Employee to the payments and benefits
hereunder as if triggered by a termination of Employee by the Company other than for Cause on the date of such
succession.
8.
Indemnity.
In any situation where under applicable law the Company has the power to indemnify, advance expenses to and defend
Employee in respect of any judgments, fines, settlements, losses, costs or expenses (including attorneys’ fees) of any nature
related to or arising out of Employee’s activities as an agent, employee, officer or director of the Company or any Affiliate
or in any other capacity on behalf of or at the request of the Company or any Affiliate, then the Company or any Affiliate
shall promptly on written request, fully indemnify Employee, advance expenses (including attorneys’ fees) to Employee
and defend Employee to the fullest extent permitted by applicable law, including but not limited to making such findings
and determinations and taking any and all such actions as the Company or any Affiliate may, under applicable law, be
permitted to take so as to effectuate such indemnification, advancement or defense. Such agreement by the Company shall
not be deemed to impair any other obligation of the Company respecting Employee’s indemnification or defense otherwise
arising out of this or any other agreement or promise of the Company under any statute.
9.
Notices.
All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party
or by registered or certified mail, return receipt requested, postage prepaid, addressed as set forth below or to such other
address as either party shall have furnished to the other in writing in accordance herewith. Notices and communications
shall be effective when actually received by the addressee.
8
If to the Company:
Three Radnor Corporate Center
Suite 300
100 Matsonford Road
Radnor, Pennsylvania 19087
If to Employee:
The address included in the Company’s records for purposes of delivering Employee’s Form W-2s.
10.
Arbitration.
Any dispute about the validity, interpretation, effect or alleged violation of this Agreement, other than with respect to
Section 4 or 5 (an “arbitrable dispute”), must be submitted to confidential arbitration in Philadelphia, Pennsylvania.
Arbitration shall take place before an experienced employment arbitrator licensed to practice law in such state and selected
in accordance with the Model Employment Arbitration Procedures of the American Arbitration Association. Arbitration
shall be the exclusive remedy of any arbitrable dispute. The Company shall bear all fees, costs and expenses of arbitration,
including its own, those of the arbitrator and those of Employee unless the arbitrator provides otherwise with respect to the
fees, costs and expenses of Employee; in no event shall Employee be chargeable with the fees, costs and expenses of the
Company or the arbitrator. The Company shall advance to Employee all expenses incurred by Employee in connection
with an arbitrable dispute and, if the arbitrator determines that Employee is the losing party in such dispute, Employee
shall reimburse such expenses to the Company unless the arbitrator provides otherwise. Should any party to this
Agreement pursue any arbitrable dispute by any method other than arbitration, the other party shall be entitled to recover
from the party initiating the use of such method all damages, costs, expenses and attorneys’ fees incurred as a result of the
use of such method. Notwithstanding anything herein to the contrary, nothing in this Agreement shall purport to waive or
in any way limit the right of any party to seek to enforce any judgment or decision on an arbitrable dispute in a court of
competent jurisdiction. Each party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts in
Philadelphia, Pennsylvania for the purposes of any proceeding arising out of this Agreement.
11.
Governing Law.
This Agreement will be governed by and construed in accordance with the laws of the Commonwealth of Virginia without
regard to conflicts of law principles.
9
12.
Entire Agreement.
This Agreement is an integration of the parties’ agreement and no agreements or representations, oral or otherwise, express
or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this
Agreement.
13.
Severability.
The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any
other provision of this Agreement, which shall remain in full force and effect.
14.
Amendment and Waivers.
No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is
(a) agreed to in writing and signed by Employee and the Company and (b) approved by the Chairperson of the Company’s
Compensation and Benefits Committee. No waiver by either party hereto at any time of any breach by the other party
hereto of, or of compliance with, any condition or provision of this Agreement to be performed by such other party shall be
deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time.
[Signature Page Follows]
10
IN WITNESS WHEREOF, the Company and Employee have executed this Agreement effective for all purposes as of the
Effective Date.
PENN VIRGINIA CORPORATION
By:
/s/ Nancy M. Snyder
Name: Nancy M. Snyder
Title: Executive Vice President and Chief Administrative Officer
EMPLOYEE
/s/ Michael E. Stamper
Michael E. Stamper
JOINDER:
PVG GP, LLC and Penn Virginia Resource GP, LLC hereby agree to comply with the provisions of Section 3B hereof.
PVG GP, LLC
By:
/s/ Nancy M. Snyder
Name: Nancy M. Snyder
Title: Vice President and Chief Administrative Officer
PENN VIRGINIA RESOURCE GP, LLC
By:
/s/ Nancy M. Snyder
Name: Nancy M. Snyder
Title: Vice President and Chief Administrative Officer
11
RELEASE OF EMPLOYER
Exhibit A
THIS RELEASE, made and entered into on this ______ day of __________, 20_, by __________________________, of
____________________________ (“Employee”).
WITNESSETH:
WHEREAS, Penn Virginia Corporation (hereinafter “Employer”) currently employs Employee as its
___________________________, but Employee’s employment [will terminate/has terminated] effective as of _______________, 20__;
and
WHEREAS, Employer and Employee have entered into an Employee Change of Control Severance Agreement dated as of
_______________, 20__ (the “Severance Agreement”) in connection with the termination of Employee’s employment;
NOW, THEREFORE, for the consideration described herein, Employee, intending to be legally bound, hereby agrees as follows:
1. For and in consideration of (a) the benefits to be paid to Employee under the Severance Agreement and (b) the Release executed
b y Employer pursuant to Section 3.C. of the Severance Agreement (the “Employee Release”), Employee does hereby REMISE,
RELEASE, AND FOREVER DISCHARGE Employer and each of its subsidiaries and affiliates, and each of their respective officers,
directors, shareholders, unitholders, partners, employees and agents and their respective successors and assigns, heirs, executors and
administrators (hereinafter in this paragraph collectively referred to as “Employer”), acting in any capacity whatsoever, of and from any and
all manner of actions and causes of actions, suits, debts, claims and demands whatsoever in law or in equity, which he ever had, now has, or
hereafter may have, or which his heirs, executors or administrators hereafter may have, by reason of any matter, cause or thing whatsoever
from the beginning of time to the date of this Release including and arising from or relating in any way to his employment relationship or
the termination of that employment relationship with Employer, including but not limited to, any claims which have been asserted, could
have been asserted, or could be asserted now or in the future under any federal, state or local laws, including any claims under the Age
Discrimination in Employment Act (“ADEA”), 29 U.S.C. §621 et seq., Title VII of the Civil Rights Act of 1964, 42 U.S.C. §2000e et seq.,
the Pennsylvania Human Relations Act, the Employee Retirement Income Security Act of 1974, as amended, any contracts between
Employer and Employee, any common law claims now or hereafter recognized and all claims for counsel fees and costs. Employee
expressly waives all rights afforded by any statute or otherwise which expressly limit the effect of a release with respect to unknown claims.
Employee acknowledges the significance of this release of unknown claims and the waiver of any protection against a release of unknown
claims. Notwithstanding the foregoing, Employee shall be entitled to enforce the terms of the Employee Release and any employee benefit
plan of Employer in which Employee is, on the date of this Release, due a benefit, and to be indemnified by Employer as to any liability,
cost or expense for which Employee would have been indemnified during employment, in accordance with the bylaws of Employer, for
actions taken on behalf of Employer within the scope of his employment by Employer.
12
2. Employee further agrees, covenants and promises that he will not in any way communicate the terms of this Release to any
person other than his immediate family, his attorney and his financial consultant or when necessary to enforce this Release or to advise a
third party of his obligations under this Release. Employee agrees not to disparage the name, business reputation or business practices of
Employer, or any of its subsidiaries or affiliates, or their respective officers, employees and directors.
3. Employee certifies he has read the terms of this Release and specifically the release in Section 1, that he has the opportunity to
discuss this Release with his attorney, and that he understands the terms and effects of this Release. Employee acknowledges, further, that
he is executing this Release of his own volition, with a full understanding of the terms and effects thereof and with the intention of releasing
all claims recited herein in exchange for the consideration described above, which he acknowledges is adequate and satisfactory. No
representations have been made to Employee concerning the terms or effects of this Release, other than those contained herein.
4. Employee hereby acknowledges that he has the right to consider this Release and the release in Section 1 for a period of 21 days
prior to execution. Employee also understands that he has the right to revoke this Release for a period of seven days following execution by
giving written notice to Penn Virginia Corporation, Attention: General Counsel, Four Radnor Corporate Center, Suite 200, 100 Matsonford
Road, Radnor, PA 19087, in which event the provisions of this Release shall be null and void, and Employer and Employee shall each have
the rights, duties, obligations and remedies afforded by applicable law.
5. Employee further acknowledges and agrees that if he materially violates any of his obligations or covenants set forth in this
Release (and has not cured such violation within 10 days of receiving written notice of such violation from Employer), he will forfeit all
payments made to him under the Severance Agreement and any and all future payments and benefits thereunder, hereunder and under the
Employee Release shall immediately terminate as of the violation.
6. The invalidity or unenforceability of any provision of this Release shall not affect the validity or enforceability of any other
provision of this Release, which shall remain in full force and effect.
13
7. This Release shall be interpreted and enforced under the laws of the Commonwealth of Pennsylvania. This Release shall be
binding and shall inure to the benefit of Employer’s permitted successors and assigns.
IN WITNESS WHEREOF, Employee executed this Release on the day and year first above written.
ATTEST:
Witness
Employee
THIS RELEASE, made and entered into on this ______ day of __________, 200_, by PENN VIRGINIA CORPORATION
(hereinafter “Employer”), with its principal office at Four Radnor Corporate Center, Suite 200, 100 Matsonford Road, Radnor, PA 19087.
RELEASE OF EMPLOYEE
Exhibit B
WITNESSETH:
WHEREAS, Employer currently employs ____________________ (“Employee” as its ___________________________, but
Employee’s employment [will terminate/has terminated] effective as of _______________, 200__; and
WHEREAS, Employer and Employee have entered into an Employee Change of Control Severance Agreement dated as of
_______________, 200__ (the “Severance Agreement”) in connection with the termination of Employee’s employment;
NOW, THEREFORE, for the consideration described herein, Employer, intending to be legally bound, hereby agrees as follows:
1. In consideration of the Release executed by Employee pursuant to Section 3 of the Severance Agreement (the “Employer
Release”), but effective only upon such Employer Release becoming irrevocable, Employer, and on behalf of each of its parent, subsidiaries
and affiliates, each of their respective officers, directors shareholders and unitholders, and their respective successors and assigns, heirs,
executors and administrators (hereinafter collectively included within the term "Employer"), does hereby REMISE, RELEASE, AND
FOREVER DISCHARGE Employee, his assigns, heirs, executors and administrators (hereinafter collectively included within the term
"Employee"), acting in any capacity whatsoever, of and from any and all manner of actions and causes of actions, suits, debts, claims and
demands whatsoever in law or in equity, which it ever had, now has, or hereafter may have, by reason of any matter, cause or thing
whatsoever from the beginning of Employee's employment with Employer to the date of this Release arising from or relating in any way to
Employee's employment relationship or the termination of his employment relationship with Employer, including but not limited to, any
claims which have been asserted, could have been asserted, or could be asserted now or in the future under any federal, state or local laws,
any contracts between Employer and Employee, any common law claims now or hereafter recognized and all claims for counsel fees and
costs, but in no event shall this Release apply to an act of fraud or any action outside the scope of Employee's employment nor to
Employer’s enforcement of the terms of the Employer Release.
2. Employer certifies it has read the terms of this Release and specifically the release in Section 1, that it has the opportunity to
discuss this Release with its attorney, and that it understands the terms and effects of this Release. Employer acknowledges, further, that it
is executing this Release of its own volition, with a full understanding of the terms and effects thereof and with the intention of releasing all
claims recited herein in exchange for the consideration described above, which it acknowledges is adequate and satisfactory. No
representations have been made to Employer concerning the terms or effects of this Release, other than those contained herein.
2
3. The invalidity or unenforceability of any provision of this Release shall not affect the validity or enforceability of any other
provision of this Release, which shall remain in full force and effect.
4. This Release shall be interpreted and enforced under the laws of the
Commonwealth of Pennsylvania. This Release shall be binding and shall inure to the benefit of Employer’s permitted successors
and assigns.
IN WITNESS WHEREOF, Employer executed this Release on the day and year first above written.
ATTEST:
PENN VIRGINIA CORPORATION
By:
Name:
Title:
3
Penn Virginia Corporation and Subsidiaries
Statement of Computation of Ratio of Earnings to Fixed Charges Calculation
(in thousands, except ratios)
Exhibit 12.1
Earnings
Pre-tax income *
Fixed charges
Total Earnings
Fixed Charges
Interest expense
Rental Interest Factor
Total Fixed Charges
2007
Year Ended December 31,
2009
2008
2010
2011
52,655 $
28,162
80,817 $
146,238 $
33,772
180,010 $
(219,068) $
53,535
(165,533) $
(109,562) $
60,003
(49,559) $
(223,053)
62,002
(161,051)
23,717 $
4,445
28,162 $
27,614 $
6,158
33,772 $
47,545 $
5,990
53,535 $
55,063 $
4,940
60,003 $
58,199
3,803
62,002
$
$
$
$
Ratio of Earnings to Fixed Charges
2.9x
5.3x
**
**
**
* Includes cash distributions from equity affiliates and excludes equity earnings from affiliates. Also excludes capitalized interest.
** During 2009, 2010 and 2011, earnings were deficient by $165,533, $49,559 and $161,051, respectively, regarding the coverage of fixed
charges.
Subsidiaries of Penn Virginia Corporation
Exhibit 21.1
Name
Penn Virginia Holding Corp.
Penn Virginia Oil & Gas Corporation
Penn Virginia Oil & Gas, L.P.
Penn Virginia Oil & Gas GP LLC
Penn Virginia Oil & Gas LP LLC
Penn Virginia MC Corporation
Penn Virginia MC Energy L.L.C.
Penn Virginia MC Operating Company L.L.C.
Penn Virginia MC Gathering Company L.L.C.
Penn Virginia Resource Holdings Corp.
Jurisdiction of Organization
Delaware
Virginia
Texas
Delaware
Delaware
Delaware
Delaware
Delaware
Oklahoma
Delaware
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 23.1
The Board of Directors
Penn Virginia Corporation:
We consent to the incorporation by reference in the registration statement on Form S-3 (No. 333-172674) and on Form S-8 (No. 33-59647,
333-82304, 333-96463, 333-96465, 333-82274, 333-103455, 333-143514, 333-159304 and 333-173990) of Penn Virginia Corporation (the
“Company”) of our report dated February 27, 2012 with respect to the consolidated balance sheets of the Company as of December 31,
2011 and 2010, and the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for each
of the years in the three-year period ended December 31, 2011, and the effectiveness of internal control over financial reporting as of
December 31, 2011, which report appears in the December 31, 2011 annual report on Form 10-K of the Company.
Houston, Texas
February 27, 2012
/s/ KPMG LLP
CONSENT OF WRIGHT & COMPANY, INC.
Exhibit 23.2
As independent petroleum consultants, Wright & Company, Inc. hereby consents to the incorporation by reference in the Registration
Statements on Form S-8 (File Nos. 33-59647, 333-96463, 333-82274, 333-96465, 333-103455, 333-143514, 333-82304, 333-159304 and
333-173990) and Form S-3 (No. 333-172674) of Penn Virginia Corporation of information from our reserves report titled “Evaluation of
Oil and Gas Reserves, to the Interests of Penn Virginia Corporation, in Certain Properties Located in Various States, Pursuant to the
Requirements of the Securities and Exchange Commission, Effective January 1, 2012, Job 11.1337”, dated January 20, 2012, and all
references to our firm included in or made a part of the Penn Virginia Corporation Annual Report on Form 10-K to be filed with the
Securities and Exchange Commission on or about February 24, 2012.
Brentwood, Tennessee
January 20, 2012
WRIGHT & COMPANY, INC.
TX Firm Registration No. F-12302
By:
/s/ D. Randall Wright
D. Randall Wright
President
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.1
I, H. Baird Whitehead, President and Chief Executive Officer of Penn Virginia Corporation (the “Registrant”), certify that:
1. I have reviewed this Annual Report on Form 10-K of the Registrant (this “Report”);
2. Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect
to the period covered by this Report;
3. Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all
material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this
Report;
4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the Registrant and we have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the Registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this Report is
being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this Report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
Report based on such evaluation; and
(d) Disclosed in this Report any change in the Registrant’s internal control over financial reporting that occurred during the
Registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the
Registrant’s internal control over financial reporting; and
5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors:
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
Registrant’s internal control over financial reporting.
Date: February 27, 2012
/s/ H. Baird Whitehead
H. Baird Whitehead
President and Chief Executive Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.2
I, Steven A. Hartman, Senior Vice President and Chief Financial Officer of Penn Virginia Corporation (the “Registrant”), certify
that:
1. I have reviewed this Annual Report on Form 10-K of the Registrant (this “Report”);
2. Based on my knowledge, this Report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect
to the period covered by this Report;
3. Based on my knowledge, the financial statements, and other financial information included in this Report, fairly present in all
material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this
Report;
4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the Registrant and we have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the Registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this Report is
being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this Report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
Report based on such evaluation; and
(d) Disclosed in this Report any change in the Registrant’s internal control over financial reporting that occurred during the
Registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the
Registrant’s internal control over financial reporting; and
5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors:
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
Registrant’s internal control over financial reporting.
Date: February 27, 2012
/s/ STEVEN A. HARTMAN
Steven A. Hartman
Senior Vice President and Chief Financial Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report of Penn Virginia Corporation (the “Company”) on Form 10-K for the year ended December
31, 2011, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, H. Baird Whitehead, President and
Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002, to the best of my knowledge, that:
1.
2.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations
of the Company.
Date: February 27, 2012
This written statement is being furnished to the Securities and Exchange Commission as an exhibit to the Report. A signed original of
this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.
/s/ H. Baird Whitehead
H. Baird Whitehead
President and Chief Executive Officer
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the Annual Report of Penn Virginia Corporation (the “Company”) on Form 10-K for the year ended December
31, 2011, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Steven A. Hartman, Senior Vice
President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, to the best of my knowledge, that:
1.
2.
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations
of the Company.
Date: February 27, 2012
This written statement is being furnished to the Securities and Exchange Commission as an exhibit to the Report. A signed original of
this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.
/s/ STEVEN A. HARTMAN
Steven A. Hartman
Senior Vice President and Chief Financial Officer
January 20, 2012
Exhibit 99.1
Penn Virginia Corporation
Four Radnor Corporate Center
100 Matsonford Road, Suite 200
Radnor, PA 19087
Attention: Mr. Frank E. Falbo, Jr.
SUBJECT: Evaluation of Oil and Gas Reserves
To the Interests of Penn Virginia Corporation
In Certain Properties Located in Various States
Pursuant to the Requirements of the
Securities and Exchange Commission
Effective January 1, 2012
Job 11.1337
At the request of Penn Virginia Corporation (PVC), Wright & Company, Inc. (Wright) has performed an evaluation to estimate
proved reserves and associated cash flow and economics from certain properties to the subject interests. This evaluation was authorized by
Mr. Frank E. Falbo, Jr. of PVC. Projections of the reserves and cash flow to the evaluated interests were based on specified economic
parameters, operating conditions, and government regulations considered applicable at the effective date. This reserves evaluation is
pursuant to the financial reporting requirements of the Securities and Exchange Commission (SEC) as specified in Regulation S-X, Rule 4-
10(a) and Regulation S-K, Rule 1202(a)(8). It is the understanding of Wright that the purpose of this evaluation is for inclusion in relevant
registration statements or other filings to the SEC. The effective date of this report is January 1, 2012. The report was completed January
20, 2012. The following is a summary of the results of the evaluation.
Penn Virginia Corporation
SEC Parameters
Producing
(PDP)
Nonproducing
(PDNP)
Total
Proved Developed
(PDP & PDNP)
Proved
Undeveloped
(PUD)
Proved Developed
Total
Proved
(PDP, PDNP
& PUD)
6,368.961
308,087.188
8,067.131
394,703.740
Net Reserves to the
Evaluated Interests
Oil, Mbbl:
Gas, MMcf:
NGL, Mbbl:
Gas Equivalent, MMcfe:
(1 bbl = 6 Mcfe)
Cash Flow (BTAX), M$
Undiscounted:
Discounted at 10%
874,405.625
Per Annum:
It should be noted that some minor differences might exist between the total summaries and the table totals due to rounding techniques in
the ARIESTM petroleum software program.
14,079.620
669,913.250
21,490.031
883,331.156
7,075.056
330,551.625
9,394.696
429,370.137
7,004.564
339,361.656
12,095.336
453,961.056
706.094
22,464.363
1,327.566
34,666.323
2,567,157.250
1,580,121.750
1,468,469.250
804,020.812
756,479.812
111,652.453
987,035.625
47,541.293
70,384.523
The properties evaluated in this report are located in the states of Kentucky, Louisiana, Mississippi, Oklahoma, Pennsylvania,
Texas, Virginia, and West Virginia. According to PVC, the total proved reserves included in this evaluation represent 100 percent of the
reported total proved reserves of PVC.
Proved oil and gas reserves are those quantities of oil and gas which can be estimated with reasonable certainty to be economically
producible under existing economic conditions, operating methods, and government regulations. As specified by the SEC regulations, when
calculating economic producibility, the base product price must be the 12-month average price, calculated as the unweighted arithmetic
average of the first-day-of-the-month price for each month within the prior 12-month period. The benchmark base prices used for this
evaluation were $96.19 per barrel for West Texas Intermediate oil at Cushing, OK and $4.118 per Million British thermal units (MMBtu)
for natural gas at Henry Hub, LA. These benchmark base prices were adjusted for energy content, quality, and basis differential, as
appropriate. The average adjusted product prices used to estimate proved reserves are $92.22 per barrel of oil and $3.949 per Mcf of gas.
Prices for oil and gas were held constant for the life of the properties. The Natural Gas Liquids (NGL) product price was estimated to be
approximately 55 percent of the base oil price, resulting in an average adjusted price of $50.69 per barrel.
Oil and other liquid hydrocarbons are expressed in thousands of United States (U.S.) barrels (Mbbl), one barrel equaling 42 U.S.
gallons. Gas volumes are expressed in millions of standard cubic feet (MMcf) at 60 degrees Fahrenheit and at the legal pressure base that
prevails in the state in which the reserves are located. No adjustment of the individual gas volumes to a common pressure base has been
made.
Net income to the evaluated interests is the cash flow after consideration of royalty revenue payable to others, standard state and
county taxes, operating expenses, and investments, as applicable. The cash flow is before federal income tax (BTAX) and excludes
consideration of any encumbrances against the properties if such exist. The cash flow (BTAX) was discounted at an annual rate of 10.00
percent (PCT) in accordance with the reporting requirements of the SEC.
The estimates of reserves contained in this report were determined by accepted industry methods, and the procedures used in this
evaluation are appropriate for the purpose served by the report. Where sufficient production history and other data were available, reserves
for producing properties were determined by extrapolation of historical production or sales trends. Analogy to similar producing properties
was used for development projects and for those properties that lacked sufficient production history to yield a definitive estimate of
reserves. When appropriate, Wright may have also utilized volumetric calculations and log correlations in the determination of estimated
ultimate recovery (EUR). These calculations are often based upon limited log and/or core analysis data and incomplete formation fluid and
rock data. Since these limited data must frequently be extrapolated over an assumed drainage area, subsequent production performance
trends or material balance calculations may cause the need for significant revisions to the estimates of reserves. Wright has used all
methods and procedures as it considered necessary under the circumstances to prepare this report.
Oil and gas reserves were evaluated for the proved developed producing (PDP), proved developed nonproducing (PDNP) and
proved undeveloped (PUD) reserves categories. The summary classification of total proved reserves combines the PDP, PDNP and PUD
categories. In preparing this evaluation, no attempt has been made to quantify the element of uncertainty associated with any category.
Reserves were assigned to each category as warranted. Wright is not aware of any local, state, or federal regulations that would preclude
PVC from continuing to produce from currently active wells or to fully develop those properties included in this report.
There are significant uncertainties inherent in estimating reserves, future rates of production, and the timing and amount of future
costs. The estimation of oil and gas reserves must be recognized as a subjective process that cannot be measured in an exact way, and
estimates of others might differ materially from those of Wright. The accuracy of any reserves estimate is a function of the quantity and
quality of available data and of subjective interpretations and judgments. It should be emphasized that production data subsequent to the
date of these estimates or changes in the analogous properties may warrant revisions of such estimates. Accordingly, reserves estimates are
often different from the quantities of oil and gas that are ultimately recovered.
All data utilized in the preparation of this report were provided by PVC. No inspection of the properties was made as this was not
considered to be within the scope of this evaluation. Wright has not independently verified the accuracy and completeness of information
and data furnished by PVC with respect to ownership interests, oil and gas production or sales, historical costs of operation and
development, product prices, or agreements relating to current and future operations and sales of production. Wright requested and received
detailed information allowing Wright to check and confirm any calculations provided by PVC with regard to product pricing, appropriate
adjustments, lease operating expenses, and capital investments for drilling the undeveloped locations. Furthermore, if in the course of
Wright’s examination something came to our attention that brought into question the validity or sufficiency of any information or data,
Wright did not rely on such information or data until we had satisfactorily resolved our questions relating thereto or independently verified
such information or data. In accordance with the requirements of the SEC, all operating costs were held constant for the life of the
properties.
Wright is not aware of any potential environmental liabilities that may exist concerning the properties evaluated. There are no
costs included in this evaluation for potential property restoration, liability, or clean up of damages, if any, that may be necessary due to past
or future operating practices.
Wright is an independent petroleum consulting firm founded in 1988 and owns no interests in the oil and gas properties covered by
this report. No employee, officer, or director of Wright is an employee, officer, or director of PVC, nor does Wright or any of its employees
have direct financial interest in PVC. Neither the employment of nor the compensation received by Wright is contingent upon the values
assigned or the opinions rendered regarding the properties covered by this report.
This report is prepared for the information of PVC, its shareholders, and for the information and assistance of its independent
public accountants in connection with their review of and report upon the financial statements of PVC, and for reporting disclosures as
required by the SEC. This report is also intended for public disclosure as an exhibit in filings made to the SEC by PVC.
Based on data and information provided by PVC, and the specified economic parameters, operating conditions, and government
regulations considered applicable at the effective date, it is Wright’s conclusion that this report provides a fair and accurate representation
of the oil and gas reserves to the interests of PVC in those certain properties included in this report.
The professional qualifications of the petroleum consultants responsible for the evaluation of the reserves and economics
information presented in this report meet the standards of Reserves Estimator as defined in the Standards Pertaining to the Estimating and
Auditing of Oil and Gas Reserves Information as promulgated by the Society of Petroleum Engineers.
It has been a pleasure to serve you by preparing this evaluation. All related data will be retained in our files and are available for
your review.
Very truly yours,
Wright & Company, Inc.
TX Reg. No. F-12302
By:
/s/ D. Randall Wright
D. Randall Wright
President