|
|
 | | | |
- close
- close
- close
- close
Penn Virginia 10-Q 2010 UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
For
the quarterly period ended September 30, 2010
or
For
the transition period from _______ to _______
Commission
File Number: 1-13283
PENN
VIRGINIA CORPORATION
(Exact
name of registrant as specified in its charter)
FOUR
RADNOR CORPORATE CENTER, SUITE 200
100
MATSONFORD ROAD
RADNOR,
PA 19087
(Address
of principal executive offices) (Zip Code)
(610)
687-8900
(Registrant’s
telephone number, including area code)
(Former name, former
address and former fiscal year, if changed since last report)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
(“Exchange Act”) during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. x Yes ¨ 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 a 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.
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). ¨ Yes x No
As of
October 29, 2010, 45,544,092 shares of common stock of the registrant were
outstanding.
PENN
VIRGINIA CORPORATION AND SUBSIDIARIES
FORM
10-Q
FOR
THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2010
Table
of Contents
PART
I.
FINANCIAL INFORMATION
Item 1 Financial
Statements
PENN
VIRGINIA CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME – unaudited
(in
thousands, except per share data)
The
accompanying notes are an integral part of these condensed consolidated
financial statements. 1
PENN
VIRGINIA CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS – unaudited
(in
thousands, except share data)
The
accompanying notes are an integral part of these condensed consolidated
financial statements. 2
PENN
VIRGINIA CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS – unaudited
(in
thousands)
The
accompanying notes are an integral part of these condensed consolidated
financial statements. 3
PENN
VIRGINIA CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – unaudited
For
the Quarterly Period Ended September 30, 2010
(in
thousands, except per share amounts)
1. Organization>
Penn
Virginia Corporation (“Penn Virginia,” the “Company,” “we,” “us” or “our”) is an
independent oil and gas company engaged primarily in the development,
exploration and production of natural gas and oil in various domestic onshore
regions including the Mid-Continent, East Texas, Appalachia and
Mississippi.
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 that is 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. (“PVG”), a publicly traded limited partnership formed by us in 2006. During
June 2010, we disposed of our remaining ownership interests in PVG and,
indirectly, our interests in PVR. The disposition transaction, as well as
related transactions that took place earlier in 2010 and 2009, are more fully
described in Note 3.
2.
Basis of Presentation
Our
Condensed Consolidated Financial Statements include the accounts of Penn
Virginia and all of its subsidiaries. Intercompany balances and
transactions have been eliminated in consolidation. Our Condensed
Consolidated Financial Statements have been prepared in accordance with
accounting principles generally accepted in the United States of America.
Preparation of these statements involves the use of estimates and judgments
where appropriate. In the opinion of management, all adjustments,
consisting of normal recurring accruals, considered necessary for a fair
presentation of our Condensed Consolidated Financial Statements have been
included. Our Condensed Consolidated Financial Statements should be read
in conjunction with the Consolidated Financial Statements and Notes included in
our Annual Report on Form 10-K for the year ended December 31, 2009.
Operating results for the nine months ended September 30, 2010 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2010.
As a
result of the aforementioned disposition of our interests in PVG, the
presentation of our Condensed Consolidated Financial Statements and Notes is
substantially different in format from certain previous filings as described in
detail in Notes 3 and 4. In addition, certain amounts for the 2010 and 2009
periods were reclassified to conform to the current presentation.
Management
has evaluated all activities of the Company through the date upon which the
Condensed Consolidated Financial Statements were issued and concluded that no
subsequent events have occurred that would require recognition in the Condensed
Consolidated Financial Statements or disclosure in the Notes to the Condensed
Consolidated Financial Statements.
3. Property Acquisitions and Divestitures>
Property
Acquisitions
Eagle
Ford and Marcellus Shale Property Acquisitions
In August
2010, we acquired approximately 6,800 net acres in the Eagle Ford Shale play in
Texas for approximately $31.1 million. The acreage includes over 40 horizontal
well locations. We are the operator with a working interest of approximately 75%
and a net revenue interest of approximately 57%. In May 2010, we acquired
approximately 10,000 net acres with Marcellus Shale rights in Pennsylvania in
two transactions for approximately $19.5 million. The first transaction included
approximately 7,900 net acres with Marcellus Shale rights and approximately
23,000 net acres with deeper rights. In connection with this acquisition, we
granted the seller a 1.5 percent overriding royalty interest on the acquired
acreage. The second transaction included approximately 2,100 net acres with
rights to the Marcellus Shale and all other formations.
Divestitures
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 $114.8 million increase to additional paid-in capital, net of
income tax effects of $64.5 million. Because we maintained a controlling
financial interest in PVG, the proceeds received from these transactions, for
accounting purposes, were treated as cash flows from financing activities on our
Condensed Consolidated Statements of Cash Flows. 4
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 $49.6 million, net of income tax effects of
$35.1 million, which is reported in the caption labeled “Gain on sale of
discontinued operations, net of tax” on our Condensed Consolidated Statements of
Income. Because we no longer held any interests in PVG, the proceeds received
from this transaction, for accounting purposes, were treated as cash flows from
investing activities on our Condensed Consolidated Statements of Cash Flows. Due
to this divestiture of our interests in PVG, we deconsolidated PVG from our
Condensed Consolidated Financial Statements. We have reported PVG’s results of
operations and financial position as discontinued operations for the 2010
periods and comparative 2009 periods. Additional information with respect to
discontinued operations is provided in Note 4.
Gulf
Coast Properties
On
December 23, 2009, we entered into purchase and sale agreements with a private
company (the “Counterparty”) which resulted in the disposition of all of our oil
and gas properties in the Gulf Coast region (southern Texas and Louisiana) in
January 2010 for cash proceeds of $23.2 million, net of transaction costs and
purchase and sale adjustments, and the exchange of certain oil and gas
properties located in the Gwinville field in northern Mississippi valued at $8.2
million. The fair values of the Gulf Coast oil and gas properties, as well as
liabilities attributable to the disposal group, were reported as assets and
liabilities held for sale as of December 31, 2009. The fair value of the
properties received from the Counterparty in the exchange was $8.2 million. An
initial deposit of $2.3 million was received from the Counterparty in December
2009. This amount was included in accrued liabilities as of December 31, 2009. A
loss on the sale of approximately $0.5 million was recognized in January 2010 as
a component of operating expenses in connection with the closing.
Other
Properties
During
the quarter ended September 30, 2010, we received net proceeds of $1.9 million
from the sale of various oil and gas properties located in North Dakota, West
Virginia and Oklahoma.
4.
Discontinued Operations
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, respectively. 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.
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. 5
The
following tables provide the detail of the assets and liabilities of
discontinued operations as of December 31, 2009:
The
following table summarizes the determination of the gain recognized on the
disposition of PVG:
We will
have continuing involvement with PVR’s natural gas midstream segment through a
number of existing agreements with various remaining terms. PVR will continue to
provide marketing and gas gathering and processing services to the Company under
certain of these agreements. We will continue to sell gas to PVR for resale at
PVR’s Crossroads plant in east Texas. In addition, we and PVG have entered
into transition service agreements attributable primarily to corporate and
information technology functions. Through September 30, 2010, we have billed PVG
for transition services in the amount of $0.7 million, net of amounts charged to
us by PVG.
We
utilize derivative financial instruments to mitigate our exposure to natural
gas, crude oil and NGL price volatility as well as the volatility in interest
rates attributable to our debt instruments. The derivative financial
instruments, which are placed with financial institutions that we believe are
acceptable credit risks, generally take the form of swaps and collars. Our
derivative financial instruments are not designated as hedges.
Commodity
Derivatives
We
determine the fair values of our oil and gas derivative agreements using both
third-party quoted forward prices for NYMEX Henry Hub gas and West Texas
Intermediate crude oil as of the end of the reporting period and 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. 6
The
following table sets forth our oil and gas derivative positions as of September
30, 2010:
Interest
Rate Swaps
In 2006,
we entered into interest rate swaps (“Previous Interest Rate Swaps”) with
notional amounts of $50 million to establish fixed interest rates on a portion
of the then outstanding borrowings under our revolving credit facility
(“Revolver”) through December 2010. During the first quarter of 2009, we
discontinued hedge accounting for all of the Previous Interest Rate Swaps.
Accordingly, subsequent fair value gains and losses for the Previous Interest
Rate Swaps have been recognized in the Derivatives caption on our Condensed
Consolidated Statements of Income.
As there
are currently no amounts outstanding under the Revolver, we entered into an
offsetting fixed-to-floating interest rate swap (“Offsetting Swap”) in December
2009 that effectively unwinds the Previous Interest Rate Swaps.
In
December 2009, we entered into a new interest rate swap (“New Interest Rate
Swap”) to establish variable rates on approximately one-third of the face amount
of the outstanding obligation under the 10.375% Senior Unsecured Notes (“Senior
Notes”).
The
following table sets forth the positions of the Previous, Offsetting and New
Interest Rate Swaps for the periods presented:
1 References to LIBOR represent
the 3-month rate. 7
Financial
Statement Impact of Derivatives
The
following table summarizes the effects of our derivative activities, as well as
the location of the gains and losses on our Condensed Consolidated Statements of
Income for the periods presented:
1 This represents interest rate swap
amounts reclassified out of Accumulated other comprehensive income ("AOCI") and
into earnings. During 2009, the Company discontinued hedge accounting for
the Previous Interest Rate Swaps. A total of $2.9 million and $3.9 million
for remaining AOCI and actual hedge settlements for the three and nine months
ended September 30, 2009 were reclassified into earnings in the same period or
periods relating to the Previous Interest Rate Swaps not designated for hedge
accounting.
2 Represents unrealized gains (losses) in
the Interest expense and Derivatives caption on our Condensed Consolidated
Statements of Income.
The
following table summarizes the fair value of our derivative instruments, as well
as the locations of these instruments, on our Condensed Consolidated Balance
Sheets for the periods presented:
At
September 30, 2010, we reported a net derivative asset of approximately $28
million related to oil and gas production. The contracts underlying such
commodity derivative asset are with five counterparties, all of which are
investment grade financial institutions, and such commodity derivative assets
are substantially concentrated with two of those counterparties. This
concentration may impact our overall credit risk, either positively or
negatively, to the extent that this counterparty is affected by changes in
economic or other conditions. We have not paid or received collateral with
respect to our derivative positions. 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, or approximately $28 million, as of September 30, 2010. No
significant uncertainties related to the collectability of amounts owed to us
exist with regard to these counterparties. 8
The
effects of derivative gains (losses) and cash settlements of our oil and gas
commodity derivatives are reported as adjustments to reconcile net income to net
cash provided by operating activities on our Condensed Consolidated Statements
of Cash Flows. These items are recorded in the “Total derivative gains” and
“Cash receipts to settle derivatives” caption on our Condensed Consolidated
Statements of Cash Flows.
As of
September 30, 2010, we had not actively traded derivative financial instruments.
In addition, as of September 30, 2010, we were not party to any derivative
financial instruments containing credit risk contingencies.
6. Property and Equipment,
net>
The
following table summarizes our property and equipment for the periods
presented:
The
following table summarizes our long-term debt for the periods
presented:
Revolving Credit
Facility
The
Revolver provides for a $300 million revolving credit facility and matures in
November 2012. We have the option to increase the commitments under the Revolver
by up to an additional $225 million upon the receipt of commitments from one or
more lenders. The Revolver is governed by a borrowing base calculation and the
availability under the Revolver may not exceed the lesser of the aggregate
commitments or the borrowing base. As of September 30, 2010, the borrowing base,
which is redetermined semi-annually, was $420 million.
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 (the “Adjusted LIBOR”), plus an applicable margin ranging from
2.000% to 3.000% or (ii) the greater of (a) the prime rate, (b) federal funds
effective rate plus 0.5% and (c) the one-month Adjusted LIBOR plus 1.0%, in each
case, plus an applicable margin (ranging from 1.000% to 2.000%). In each case,
the applicable margin is determined based on the ratio of our outstanding
borrowings to the available Revolver capacity.
The
Revolver is guaranteed by Penn Virginia and all of our material oil and gas
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.
As of
September 30, 2010, there were no amounts outstanding under the Revolver, and we
had remaining borrowing capacity of up to $299.3 million, net of outstanding
letters of credit of $0.7 million. In addition, there have been no amounts
outstanding through the nine months ended September 30, 2010. As of September
30, 2010 and through the date upon which the Condensed Consolidated Financial
Statements were issued, we were in compliance with the applicable covenants of
the Revolver. 9
Senior
Notes
The
Senior Notes, which mature in June 2016, were originally sold at 97% of par,
equating to an effective yield to maturity of approximately 11%. The Senior
Notes are senior to our existing and future subordinated indebtedness and are
effectively subordinated to all of our indebtedness, including the Revolver, to
the extent of the collateral securing that indebtedness. The obligations under
the Senior Notes are fully and unconditionally guaranteed by the Guarantor
Subsidiaries.
As of
September 30, 2010, approximately 98% of our consolidated assets were held by
the Guarantor Subsidiaries with the remainder being held by our parent company,
which is the issuer of the Senior Notes. The parent company incurs operating
expenses in connection with the administration of its investment in its
operating subsidiaries and incurs interest expense and related borrowing costs
attributable to the Senior Notes and the 4.5% Convertible Notes (“Convertible
Notes”). Accordingly, the parent company has no independent 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. As a result of the sale
of the PVG Common Units, the remaining unrestricted subsidiaries no longer have
any assets other than net intercompany accounts receivable with the parent
company resulting primarily from the transfer of proceeds received from the
sale.
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 are represented by a liability component which is reported
herein as 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 following table summarizes the carrying amount of
these components for the periods presented:
The
unamortized discount will be amortized through the end of 2012. The effective
interest rate on the liability component of the Convertible Notes for the three
and nine months ended September 30, 2010 and 2009 was 8.5%. During each of the
three and nine month periods, we recognized $2.6 million and $7.8 million of
interest expense, respectively, related to the contractual coupon rate on the
Convertible Notes. In addition, we recognized $1.9 million and $1.7 million and
$5.5 million and $5.0 million of interest expense related to the amortization of
the discount for the three and nine months ended September 30, 2010 and 2009,
respectively.
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 the 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. Upon exercise of the Warrants, we will deliver shares of our
common stock equal in value to the excess of the then market price over the
strike price of the Warrants. 10
If the
market value per share of our common stock at the time of conversion of the
Convertible Notes is above the strike price of the Note Hedges, the Note Hedges
entitle us to receive from the Option Counterparties net shares of our common
stock (and cash for any fractional share cash amount) based on the excess of the
then current market price of our common stock over the strike price of the Note
Hedges. Additionally, if the market price of our common stock at the time of
exercise of the Warrants exceeds the strike price of the Warrants, we will owe
the Option Counterparties net shares of our common stock (and cash for any
fractional share cash amount), not offset by the Note Hedges, in an amount based
on the excess of the then current market price of our common stock over the
strike price of the Warrants.
8.
Additional Balance Sheet Detail
The
following tables summarize components of selected balance sheet accounts for the
periods presented:
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||