Penn Virginia Corporation Announces 2007 Results

Penn Virginia Corporation (NYSE:PVA) today reported financial and operational results for the fiscal year and three months ended December 31, 2007.

Full-Year and Fourth Quarter 2007 Highlights

Full-year 2007 results, with comparisons to full-year 2006 results, included the following:

Fourth quarter 2007 results, with comparisons to fourth quarter 2006 results, included the following:

A reconciliation of non-GAAP financial measures appears in the financial tables later in this release.

For 2007, operating income was $192.6 million, which was $22.1 million, or 13 percent, higher than 2006. The increase was primarily due to higher production in the oil and gas segment and higher processing margins in the natural gas midstream (PVR Midstream) segment, offset in part by higher operating expenses in the oil and gas segment, lower operating income from the coal and natural resource management (PVR Coal & NRM) segment and higher corporate general and administrative (G&A) expense. Operating cash flow for 2007 increased $39.2 million, or 15 percent, as compared to 2006, primarily due to the increase in operating income and a decrease in cash paid to settle derivatives, partially offset by higher interest expense resulting from increased debt levels. The 15 percent increase in adjusted net income was primarily due to the increase in operating income and a decrease in cash paid to settle derivatives, partially offset by the increase in interest expense. The increase in corporate G&A expense related primarily to increased personnel-related costs resulting from new employees added during 2007, higher stock-based compensation expense, new information systems conversion costs and a full year of PVG-related expenses in 2007.

In addition to the factors discussed above relating to the increase in operating income, the 33 percent decrease in net income in 2007 was primarily due to a $69.7 million increase in derivatives expense resulting mainly from changes in the valuation of unrealized derivative positions and higher interest expense, along with the related effects on income tax expense and minority interest.

In the fourth quarter of 2007, operating income was $45.1 million, which was $17.8 million, or 65 percent, higher than the fourth quarter of 2006. The increase was primarily due to higher production in the oil and gas segment and higher processing margins from PVR Midstream, offset in part by higher operating expenses in the oil and gas segment, lower segment operating income from PVR Coal & NRM and higher corporate G&A expense. Operating cash flow increased $11.0 million, or 17 percent, primarily due to the increase in operating income and a decrease in cash paid to settle derivatives, partially offset by higher interest expense resulting from increased debt levels. The 81 percent increase in adjusted net income was primarily due to the increase in operating income and a decrease in cash paid to settle derivatives, partially offset by the increase in interest expense. The increase in corporate G&A related primarily to increased personnel-related costs resulting from new employees added during 2007, higher stock-based compensation expense, new information systems conversion costs and a full quarter of PVG-related expenses in 2007.

The 50 percent decrease in net income in the fourth quarter of 2007 was primarily due to a $34.1 million increase in derivatives expense resulting mainly from changes in the valuation of unrealized derivative positions and higher interest expense, along with the related effects on income tax expense and minority interest.

Management Comment

A. James Dearlove, President and Chief Executive Officer of PVA, said, “We are pleased with the performance of our oil and gas operations, which delivered a 30 percent production increase in 2007 and a 25 percent fourth quarter production increase over the prior year quarter. This exceeds our original 2007 guidance, which estimated a 17 to 23 percent increase in production, excluding acquisitions. As a result of our results in 2007 and based on our 2008 capital expenditures budget, we are expecting production growth of 21 to 27 percent in 2008, excluding contributions from acquisitions or significant exploratory success.

“We also reported record proved reserves of 680 Bcfe at year-end 2007, a 40 percent increase over the prior year levels with 71 percent replaced through the drillbit. We replaced 628 percent of 2007 production at a reserve replacement cost of $2.04 per thousand cubic feet of natural gas equivalent (Mcfe). We drilled 289 gross wells during 2007 and anticipate drilling approximately 330 gross wells during 2008 as part of our $475 million oil and gas capital expenditures budget.

“In December 2007, we completed successful public securities offerings, raising approximately $372 million of gross proceeds from the dual offerings of both convertible debt and equity. In addition to broadening access to Penn Virginia by the investment community, the capital raise allowed us to dramatically reduce our bank borrowings such that we had over $350 million of credit availability at year-end 2007.

“PVR Midstream, the natural gas midstream segment of Penn Virginia Resource Partners, L.P. (NYSE:PVR), experienced a strong increase in operating income and cash flow throughout 2007 as the fractionation or “frac” spread – which is the difference between the price of natural gas liquids (NGLs) sold and the cost of natural gas purchased on a per MMBtu basis – was at record high levels and has remained strong into early 2008. PVR Midstream is expecting organic growth in 2008, including the completion of two new gas processing plants in Texas, one of which will process most of PVA’s liquids-rich Cotton Valley natural gas production in east Texas.

“PVR Coal & NRM completed two coal reserve acquisitions in the Illinois Basin during 2007. In addition, PVR Coal & NRM completed significant acquisitions in Appalachia of forestland ($93 million) and oil and gas royalties ($31 million). Coal production by PVR’s lessees was essentially flat in 2007 relative to the prior year, due to disruptions of Appalachian production in the fourth quarter; however, lessee tonnage is expected to increase in 2008. The overall market for coal improved during 2007 as spot prices increased in the areas where our royalties are market sensitive, although most of our lessees’ contracts with their customers are long-term in nature. The primary reasons for the improvement in the coal market were increased domestic demand, as well as increased exports of Appalachian coal.

“The pretax value of our 82 percent stake in Penn Virginia GP Holdings, L.P. (NYSE: PVG), the owner of the general partner and largest limited partner of PVR, has increased by approximately $300 million, or approximately $7.25 per PVA share, since its initial public offering in December 2006. Considering the increased market value of PVG, as well as the approximate $41 million current annualized run rate of distributions that we receive from PVG, we are very pleased with the performance of this investment.

“We look forward to continued growth in 2008 and believe that we have the proper strategies in place at each business segment and the financial strength to achieve that growth.”

Oil and Gas Segment Review

Proved natural gas and oil reserves increased by 40 percent in 2007, from 487 Bcfe at December 31, 2006 to 680 Bcfe at December 31, 2007. This increase was a result of successful drilling programs and acquisitions in the Cotton Valley play in east Texas, the Mid-Continent region and the Selma Chalk play in Mississippi. Oil and gas production grew 30 percent from 31.3 Bcfe in 2006 to a record 40.6 Bcfe in 2007. Fourth quarter 2007 oil and gas production grew 25 percent to 10.7 Bcfe from 8.6 Bcfe in the fourth quarter of 2006. See today’s separate operational update news release for a more detailed discussion of full year and fourth quarter 2007 drilling and production operations for the oil and gas business segment.

Oil and gas operating income for 2007 was $104.2 million, or 23 percent higher than the $84.8 million in 2006. Total oil and gas revenues increased by 29 percent from $236.0 million in 2006 to $303.2 million in 2007. The increase in revenues was primarily attributable to the production increase and a $12.2 million gain on the sale in September 2007 of non-operated working interests in oil and gas properties, partially offset by a six percent decrease in the realized natural gas price.

In 2007, total oil and gas segment expenses increased by $47.9 million, or 32 percent, to $199.0 million, or $4.91 per Mcfe produced, from $151.1 million, or $4.83 per Mcfe produced, in 2006, as discussed below:

Oil and gas operating income for the fourth quarter of 2007 was $18.8 million, or 117 percent higher than the $8.7 million in the fourth quarter of 2006. Total oil and gas revenues increased by 35 percent from $57.7 million in the fourth quarter of 2006 to $77.7 million in the fourth quarter of 2007. The increase in revenues was primarily attributable to the production increase, as well as a four percent increase in the realized natural gas price and a 57 percent increase in the realized oil and condensate price.

In the fourth quarter of 2007, total oil and gas segment expenses increased by $10.1 million, or 20 percent, to $58.9 million, or $5.52 per Mcfe produced, from $49.0 million, or $5.73 per Mcfe produced, in the fourth quarter of 2006, as discussed below:

Natural Gas Midstream and Coal & NRM Segments (PVR)

Operating income for PVR Midstream increased 67 percent to $48.9 million in 2007 from $29.4 million in the prior year. Fourth quarter 2007 segment operating income increased 191 percent to $20.6 million from $7.1 million in the prior year quarter. Operating income for PVR Coal & NRM decreased six percent to $68.8 million in 2007 from $73.4 million in the prior year. In the fourth quarter of 2007, operating income for PVR Coal & NRM decreased by 15 percent to $15.6 million from $18.3 million in the prior year quarter. Financial and operational results and full-year 2008 guidance for each of these segments are provided in the financial tables later in this release. In addition, operational updates for these segments are discussed in more detail in PVR’s news release dated February 13, 2008 (please visit PVR’s website, www.pvresource.com under “For Investors,” for a copy of the release).

Consolidated Financial Statements

PVA is the largest unitholder of PVG and reports its financial results on a consolidated basis with the financial results of PVG. Similarly, PVG owns PVR’s general partner, including the incentive distribution rights, and is PVR’s largest limited partner unitholder, and reports its financial results on a consolidated basis with the financial results of PVR. PVG currently has no separate operating activities apart from those conducted by PVR and derives its cash flow solely from cash distributions received from PVR.

A conversion of the GAAP-compliant financial statements (“As reported”) to the equity method of accounting (“As adjusted”) is included in the “Conversion to Non-GAAP Equity Method” section of this release. Using the equity method, PVG’s results are reduced to a few line items and the results from oil and gas operations and corporate are therefore highlighted. Management believes that this is useful since the oil and gas and corporate segments provide a majority of the cash flow from operations generated by PVA, as compared to distributions PVA receives from PVG and PVR. Management believes that the financial statements presented using the equity method are less complex and more comparable to those of other oil and gas exploration and production companies.

Partnership Distributions

As previously announced, on February 19, 2008, PVG will pay to unitholders of record as of February 4, 2008 a quarterly cash distribution covering the period October 1 through December 31, 2007 in the amount of $0.32 per unit, or an annualized rate of $1.28 per unit. This annualized distribution represents a $0.08 per unit, or seven percent, increase over the annualized distribution of $1.20 per unit paid in the prior quarter and a 33 percent increase over the annualized distribution of $0.96 per unit for the same quarter of 2007.

As the result of PVG’s distribution increase, PVA will receive a cash distribution of approximately $10.3 million in the first quarter of 2008 or approximately $41.1 million on an annualized basis.

Capital Resources and Impact of Derivatives

As of December 31, 2007, PVA had outstanding borrowings of $352.0 million, including $230.0 million of convertible senior subordinated notes due 2012 and $122.0 of borrowings under its revolving credit facility. The $131.0 million increase in outstanding borrowings as compared to the $221.0 million at December 31, 2006 was primarily due to higher spending to fund PVA’s oil and gas capital expenditures and acquisitions during 2007, partially offset by the net proceeds from the offering of 3.45 million shares of common stock in December 2007 and the divestitures of working and royalty interests. PVR’s outstanding borrowings as of December 31, 2007 were $411.7 million, including $12.6 million of senior unsecured notes classified as current portion of long-term debt, an increase from $218.0 million as of December 31, 2006. The increase in PVR’s outstanding borrowings was primarily due to coal reserve and forestland acquisitions and natural gas midstream capital expenditures. Consolidated interest expense increased from $24.8 million in 2006 to $37.4 million in 2007. Consolidated interest expense increased from $7.5 million in the fourth quarter of 2006 to $11.5 million in the fourth quarter of 2007. The increases were due higher weighted average levels of outstanding borrowings during 2007 as compared to the prior year periods.

During 2007, derivatives expense was $47.3 million, as compared to income of $19.5 million in 2006. Derivatives expense related to PVR Midstream, included in consolidated derivatives expense, was $45.6 million in 2007. Cash settlements of derivatives included in these amounts resulted in net cash payments of $3.7 million during 2007, as compared to $8.9 million of net cash receipts in 2006. Cash settlements of derivatives related to PVR Midstream, included in consolidated cash settlements, were $17.8 million of net cash payments in 2007. For the fourth quarter of 2007, derivatives expense was $25.2 million, as compared to income of $8.1 million in the prior year quarter. Derivatives expense related to PVR Midstream was $24.6 million in the fourth quarter of 2007. Cash settlements of derivatives included in these amounts resulted in net cash payments of $5.9 million during the fourth quarter of 2007, as compared to $1.5 million of net cash receipts in the fourth quarter of 2006. Cash settlements of derivatives related to PVR Midstream were $8.8 million of net cash payments in the fourth quarter of 2007. See the natural gas midstream segment review in this release for a discussion of the impact of derivatives on PVR Midstream’s gross processing margin.

Based on derivatives currently in place for natural gas production, we have hedged approximately 38 to 40 percent of natural gas production for 2008, based on the latest production guidance, at weighted average collar floors and ceilings of $7.85 and $9.65 per MMBtu. See the Guidance Table included in this release for details of production guidance and derivative positions.

Guidance for 2008

See the Guidance Table included in this release for guidance estimates for full-year 2008. These estimates, including capital expenditure plans, are meant to provide guidance only and are subject to revision as PVA’s and PVR’s operating environments change.

Conference Call

A conference call and webcast, during which management will discuss 2007 full-year and fourth quarter financial and operational results for PVA, is scheduled for Thursday, February 14, 2008 at 3:00 p.m. ET. Prepared remarks by A. James Dearlove, President and Chief Executive Officer, will be followed by a question and answer period. Investors and analysts may participate via phone by dialing 1-877-407-9205 five to ten minutes before the scheduled start of the conference call, or via webcast by logging on to PVA’s website at www.pennvirginia.com at least 20 minutes prior to the scheduled start of the call to download and install any necessary audio software. A telephonic replay of the call will be available until February 28, 2008 at 11:59 p.m. ET by dialing 1-877-660-6853 and using the following replay pass codes: account #286, conference ID #270353. An on-demand replay of the conference call will be available at PVA’s website beginning shortly after the call.

Headquartered in Radnor, PA and a member of the S&P SmallCap 600 Index, Penn Virginia Corporation (NYSE:PVA) is an independent natural gas and oil company focused on the exploration, acquisition, development and production of reserves in onshore regions of the U.S., including the Cotton Valley play in east Texas, the Selma Chalk play in Mississippi, the Mid-Continent region, the Appalachian Basin and the Gulf Coast of Louisiana and Texas. PVA also owns approximately 82 percent of Penn Virginia GP Holdings, L.P. (NYSE:PVG), the owner of the general partner and the largest unit holder of Penn Virginia Resource Partners, L.P. (NYSE:PVR), a manager of coal and natural resource properties and related assets and the operator of a midstream natural gas gathering and processing business. For more information, please visit PVA’s website at www.pennvirginia.com.

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. 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, crude oil, NGLs and coal; the cost of finding and successfully developing oil and gas reserves; our ability to acquire new oil and gas reserves and the price for which such reserves can be acquired; energy prices generally and specifically, the price of natural gas, crude oil, NGLs and coal; the relationship between natural gas and NGL prices; the price of coal and its comparison to the price of natural gas and crude oil; the projected demand for natural gas, crude oil, NGLs and coal; the projected supply of natural gas, crude oil, NGLs and coal; the availability of required drilling rigs, production equipment and materials; our ability to obtain adequate pipeline transportation capacity for our oil and gas production; non-performance by third party operators in wells in which we own an interest; competition among producers in the oil and natural gas and coal industries generally and among natural gas midstream companies; the extent to which the amount and quality of actual production of our oil and natural gas or PVR’s coal differs from estimated recoverable proved oil and gas reserves and coal reserves; PVR’s ability to generate sufficient cash from its midstream and coal and natural resource management businesses to pay the minimum quarterly distribution to its general partner and its unitholders; hazards or operating risks incidental to our business and to PVR’s coal or midstream business; PVR’s ability to acquire new coal reserves or natural gas midstream assets on satisfactory terms; the price for which PVR can acquire coal reserves; PVR’s ability to continually find and contract for new sources of natural gas supply for its midstream business; PVR’s ability to retain existing or acquire new natural gas midstream customers; PVR’s ability to lease new and existing coal reserves; the ability of PVR’s lessees to produce sufficient quantities of coal on an economic basis from PVR’s reserves; the ability of PVR’s lessees to obtain favorable contracts for coal produced from its reserves; PVR’s exposure to the credit risk of its coal lessees and natural gas midstream customers; hazards or operating risks incidental to natural gas midstream operations; unanticipated geological problems; the dependence of PVR’s natural gas midstream business on having connections to third party pipelines; the occurrence of unusual weather or operating conditions including force majeure events; the failure of equipment or processes to operate in accordance with specifications or expectations; the failure of PVR’s infrastructure and its lessees’ mining equipment or processes to operate in accordance with specifications or expectations; delays in anticipated start-up dates of our oil and natural gas production and PVR’s lessees’ mining operations and related coal infrastructure projects; environmental risks affecting the drilling and producing of oil and gas wells, the mining of coal reserves or the production, gathering and processing of natural gas; the timing of receipt of necessary governmental permits by us and by PVR or PVR’s lessees; the risks associated with having or not having price risk management programs; labor relations and costs; accidents; changes in governmental regulation or enforcement practices, especially with respect to environmental, health and safety matters, including with respect to emissions levels applicable to coal-burning power generators; uncertainties relating to the outcome of current and future litigation regarding mine permitting; risks and uncertainties relating to general domestic and international economic (including inflation and interest rates) and political conditions (including the impact of potential terrorist attacks); the experience and financial condition of PVR’s coal lessees and natural gas midstream customers, including their ability to satisfy their royalty, environmental, reclamation and other obligations to PVR and others; PVR’s ability to expand its natural gas midstream business by constructing new gathering systems, pipelines and processing facilities on an economic basis and in a timely manner; coal handling joint venture operations; changes in financial market conditions; and PVG’s ability to generate sufficient cash from its interests in PVR to maintain and pay the quarterly distribution to its general partner and its unitholders.

Additional information concerning these and other factors can be found in our press releases and public periodic filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K for the year ended December 31, 2006. 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 the result of new information, future events or otherwise.