UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





(Mark
One)





x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934





For
      the quarterly period ended
            September
      30, 2009





or





 ̈
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934





For
      the transition period from
            
            toCommission
      File Number:
            1-33171





PENN
VIRGINIA GP HOLDINGS, L.P.


(Exact
name of registrant as specified in its charter)





Delaware
            
            20-5116532(State
      or other jurisdiction of incorporation or organization)
            
            (I.R.S.
      Employer Identification No.)





THREE
      RADNOR CORPORATE CENTER, SUITE 300
              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  ̈  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.


Large
      accelerated filer  ̈      Accelerated
      filer xNon-accelerated
      filer  ̈ (Do
      not check if a smaller reporting company)
            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  x No





As of
November 5, 2009, 39,074,500 common units representing limited partner interests
were outstanding.









PENN
VIRGINIA GP HOLDINGS, L.P. AND SUBSIDIARIES





INDEX





PagePART I.
                            Financial Information
                            
                            1Item 1.
                            Financial Statements
                            
                            1Condensed
      Consolidated Statements of Income for the Three
      and Nine Months Ended September 30, 2009 and
2008
                            
                            1Condensed
      Consolidated Balance Sheets as of September 30,
      2009 and December 31, 2008
                            
                            2Condensed
      Consolidated Statements of Cash Flows for the Three and
      Nine Months Ended September 30, 2009 and 2008
                            
                            3Notes to Condensed
      Consolidated Financial Statements
                            
                            4Item 2.
                            Management’s Discussion and Analysis of Financial
      Condition and Results of Operations
                            
                            14Item 3.
                            Quantitative
      and Qualitative Disclosures About Market Risk
                            
                            28Item
      4.
                            Controls
      and Procedures
                            
                            31PART II.
                            Other Information
                            
                            32Item
      1A.
                            Risk
      Factors
                            
                            32Item 6.
                            Exhibits
                            
                            32









PART
I.    FINANCIAL INFORMATION





Item
1    Financial
Statements





PENN
VIRGINIA GP HOLDINGS, L.P. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF INCOME – unaudited


(in
thousands, except per unit data)





Three Months Ended
                        
                        
                        Nine Months EndedSeptember 30,
                        
                        
                        September 30,2009
                        
                        
                        2008
                        
                        
                        2009
                        
                        
                        2008RevenuesNatural
      gas midstream
                        
                        $
                        118,443
                        
                        
                        $
                        241,282
                        
                        
                        $
                        348,882
                        
                        
                        $
                        601,127Coal
      royalties
                        
                        
                        29,821
                        
                        
                        
                        33,308
                        
                        
                        
                        90,448
                        
                        
                        
                        88,911Coal
      services
                        
                        
                        1,869
                        
                        
                        
                        1,815
                        
                        
                        
                        5,502
                        
                        
                        
                        5,518Other
                        
                        
                        5,492
                        
                        
                        
                        8,871
                        
                        
                        
                        16,971
                        
                        
                        
                        23,039Total
      revenues
                        
                        
                        155,625
                        
                        
                        
                        285,276
                        
                        
                        
                        461,803
                        
                        
                        
                        718,595ExpensesCost
      of midstream gas purchased
                        
                        
                        92,355
                        
                        
                        
                        211,262
                        
                        
                        
                        285,129
                        
                        
                        
                        513,778Operating
                        
                        
                        9,030
                        
                        
                        
                        9,041
                        
                        
                        
                        26,938
                        
                        
                        
                        24,553Taxes
      other than income
                        
                        
                        1,005
                        
                        
                        
                        969
                        
                        
                        
                        3,208
                        
                        
                        
                        3,017General
      and administrative
                        
                        
                        8,447
                        
                        
                        
                        7,618
                        
                        
                        
                        25,399
                        
                        
                        
                        22,057Depreciation,
      depletion and amortization
                        
                        
                        17,851
                        
                        
                        
                        16,903
                        
                        
                        
                        51,971
                        
                        
                        
                        41,322Total
      expenses
                        
                        
                        128,688
                        
                        
                        
                        245,793
                        
                        
                        
                        392,645
                        
                        
                        
                        604,727Operating
      income
                        
                        
                        26,937
                        
                        
                        
                        39,483
                        
                        
                        
                        69,158
                        
                        
                        
                        113,868Other
      income (expense)Interest
      expense
                        
                        
                        (6,505
                        )
                        
                        
                        (7,060
                        )
                        
                        
                        (18,486
                        )
                        
                        
                        (17,366
                        )Other
                        
                        
                        344
                        
                        
                        
                        (4,118
                        )
                        
                        
                        1,020
                        
                        
                        
                        (3,072
                        )Derivatives
                        
                        
                        (2,810
                        )
                        
                        
                        15,742
                        
                        
                        
                        (12,005
                        )
                        
                        
                        (6,424
                        )Net
      income
                        
                        $
                        17,966
                        
                        
                        $
                        44,047
                        
                        
                        $
                        39,687
                        
                        
                        $
                        87,006Less
      net income attributable to noncontrolling interests
                        
                        
                        (7,794
                        )
                        
                        
                        (23,783
                        )
                        
                        
                        (14,327
                        )
                        
                        
                        (43,878
                        )Net
      income attributable to Penn Virginia GP Holdings, L.P.
                        
                        $
                        10,172
                        
                        
                        $
                        20,264
                        
                        
                        $
                        25,360
                        
                        
                        $
                        43,128Net
      income per unit attributable to Penn Virginia GP Holdings, L.P.,basic and diluted
                        
                        $
                        0.26
                        
                        
                        $
                        0.52
                        
                        
                        $
                        0.65
                        
                        
                        $
                        1.10Weighted
      average number of units outstanding, basic and diluted
                        
                        
                        39,075
                        
                        
                        
                        39,075
                        
                        
                        
                        39,075
                        
                        
                        
                        39,075




The
accompanying notes are an integral part of these condensed consolidated
financial statements.




1




PENN
VIRGINIA GP HOLDINGS, L.P. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS – unaudited


(in
thousands)





September 30,
                      
                      
                      December 31,2009
                      
                      
                      2008AssetsCurrent
      assetsCash
      and cash equivalents
                      
                      $
                      21,194
                      
                      
                      $
                      18,338Accounts
      receivable, net of allowance for doubtful accounts
                      
                      
                      60,023
                      
                      
                      
                      73,267Derivative
      assets
                      
                      
                      7,322
                      
                      
                      
                      30,431Other
      current assets
                      
                      
                      4,304
                      
                      
                      
                      4,263Total
      current assets
                      
                      
                      92,843
                      
                      
                      
                      126,299Property,
      plant and equipment
                      
                      
                      1,154,849
                      
                      
                      
                      1,093,526Accumulated
      depreciation, depletion and amortization
                      
                      
                      (244,855
                      )
                      
                      
                      (198,407
                      )Net
      property, plant and equipment
                      
                      
                      909,994
                      
                      
                      
                      895,119Equity
      investments
                      
                      
                      87,520
                      
                      
                      
                      78,442Intangible
      assets, net
                      
                      
                      87,108
                      
                      
                      
                      92,672Other
      long-term assets
                      
                      
                      41,309
                      
                      
                      
                      35,142Total
      assets
                      
                      $
                      1,218,774
                      
                      
                      $
                      1,227,674Liabilities
      and Partners’ CapitalCurrent
      liabilitiesAccounts
      payable
                      
                      $
                      46,760
                      
                      
                      $
                      60,442Accrued
      liabilities
                      
                      
                      10,170
                      
                      
                      
                      11,039Deferred
      income
                      
                      
                      3,043
                      
                      
                      
                      4,842Derivative
      liabilities
                      
                      
                      10,900
                      
                      
                      
                      13,585Total
      current liabilities
                      
                      
                      70,873
                      
                      
                      
                      89,908Deferred
      income
                      
                      
                      6,502
                      
                      
                      
                      6,150Other
      liabilities
                      
                      
                      17,469
                      
                      
                      
                      18,078Derivative
      liabilities
                      
                      
                      4,323
                      
                      
                      
                      6,915Long-term
      debt
                      
                      
                      628,100
                      
                      
                      
                      568,100Partners’
      capitalPenn
      Virginia GP Holdings, L.P. partners’ capital
                      
                      
                      251,729
                      
                      
                      
                      269,542Noncontrolling
      interests of subsidiaries
                      
                      
                      239,778
                      
                      
                      
                      268,981Total
      partners’ capital
                      
                      
                      491,507
                      
                      
                      
                      538,523Total
      liabilities and partners’ capital
                      
                      $
                      1,218,774
                      
                      
                      $
                      1,227,674




The
accompanying notes are an integral part of these condensed consolidated
financial statements.




2




PENN
VIRGINIA GP HOLDINGS, L.P. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS – unaudited


(in
thousands)





Three
      Months Ended
                            
                            
                            Nine
      Months EndedSeptember
      30,
                            
                            
                            September
      30,2009
                            
                            
                            2008
                            
                            
                            2009
                            
                            
                            2008Cash
      flows from operating activitiesNet
      income
                            
                            $
                            17,966
                            
                            
                            $
                            44,047
                            
                            
                            $
                            39,687
                            
                            
                            $
                            87,006Adjustments
      to reconcile net income to netcash
      provided by operating activities:Depreciation,
      depletion and amortization
                            
                            
                            17,851
                            
                            
                            
                            16,903
                            
                            
                            
                            51,971
                            
                            
                            
                            41,322Commodity
      derivative contracts:Total
      derivative losses (gains)
                            
                            
                            3,668
                            
                            
                            
                            (14,239
                            )
                            
                            
                            14,234
                            
                            
                            
                            10,552Cash
      settlements of derivatives
                            
                            
                            (314
                            )
                            
                            
                            (14,054
                            )
                            
                            
                            4,135
                            
                            
                            
                            (33,279
                            )Non-cash
      interest expense
                            
                            
                            1,416
                            
                            
                            
                            1,175
                            
                            
                            
                            3,149
                            
                            
                            
                            1,543Equity
      earnings, net of distributions received
                            
                            
                            (1,386
                            )
                            
                            
                            (1,409
                            )
                            
                            
                            (2,456
                            )
                            
                            
                            (1,415
                            )Other
                            
                            
                            1,202
                            
                            
                            
                            (896
                            )
                            
                            
                            570
                            
                            
                            
                            (1,337
                            )Changes
      in operating assets and liabilities
                            
                            
                            1,892
                            
                            
                            
                            (10,853
                            )
                            
                            
                            3,540
                            
                            
                            
                            (11,277
                            )Net
      cash provided by operating activities
                            
                            
                            42,295
                            
                            
                            
                            20,674
                            
                            
                            
                            114,830
                            
                            
                            
                            93,115Cash
      flows from investing activitiesAcquisitions
                            
                            
                            (27,648
                            )
                            
                            
                            (156,791
                            )
                            
                            
                            (29,510
                            )
                            
                            
                            (253,031
                            )Additions
      to property, plant and equipment
                            
                            
                            (11,523
                            )
                            
                            
                            (16,062
                            )
                            
                            
                            (43,781
                            )
                            
                            
                            (54,902
                            )Other
                            
                            
                            300
                            
                            
                            
                            982
                            
                            
                            
                            872
                            
                            
                            
                            1,657Net
      cash used in investing activities
                            
                            
                            (38,871
                            )
                            
                            
                            (171,871
                            )
                            
                            
                            (72,419
                            )
                            
                            
                            (306,276
                            )Cash
      flows from financing activitiesDistributions
      to partners
                            
                            
                            (30,323
                            )
                            
                            
                            (28,884
                            )
                            
                            
                            (90,297
                            )
                            
                            
                            (78,276
                            )Proceeds
      from borrowings
                            
                            
                            52,000
                            
                            
                            
                            242,000
                            
                            
                            
                            93,000
                            
                            
                            
                            366,800Repayments
      of borrowings
                            
                            
                            (21,000
                            )
                            
                            
                            (65,400
                            )
                            
                            
                            (33,000
                            )
                            
                            
                            (220,800
                            )Net
      proceeds from issuance of partners’ capital
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            -
                            
                            
                            
                            138,015Other
                            
                            
                            -
                            
                            
                            
                            (3,454
                            )
                            
                            
                            (9,258
                            )
                            
                            
                            (4,074
                            )Net
      cash provided by (used in) financing activities
                            
                            
                            677
                            
                            
                            
                            144,262
                            
                            
                            
                            (39,555
                            )
                            
                            
                            201,665Net
      increase (decrease) in cash and cash equivalents
                            
                            
                            4,101
                            
                            
                            
                            (6,935
                            )
                            
                            
                            2,856
                            
                            
                            
                            (11,496
                            )Cash
      and cash equivalents – beginning of period
                            
                            
                            17,093
                            
                            
                            
                            25,942
                            
                            
                            
                            18,338
                            
                            
                            
                            30,503Cash
      and cash equivalents – end of period
                            
                            $
                            21,194
                            
                            
                            $
                            19,007
                            
                            
                            $
                            21,194
                            
                            
                            $
                            19,007Supplemental
      disclosure:Cash
      paid for interest
                            
                            $
                            6,444
                            
                            
                            $
                            6,764
                            
                            
                            $
                            18,446
                            
                            
                            $
                            17,136Noncash
      investing activities:Issuance
      of PVR units for acquisition
                            
                            
                            
                            
                            
                            $
                            15,171
                            
                            
                            
                            
                            
                            
                            $
                            15,171PVG
      units given as consideration for acquisition
                            
                            
                            
                            
                            
                            $
                            68,021
                            
                            
                            
                            
                            
                            
                            $
                            68,021Other
      liabilities
                            
                            
                            
                            
                            
                            $
                            4,673
                            
                            
                            
                            
                            
                            
                            $
                            4,673




The
accompanying notes are an integral part of these condensed consolidated
financial statements.




3




PENN
VIRGINIA GP HOLDINGS, L.P. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – unaudited


September
30, 2009





1. Organization





Penn
Virginia GP Holdings, L.P. (the “Partnership,” “we,” “us” or “our”) is a
publicly traded Delaware limited partnership formed in June 2006 that owns
three types of equity interests in Penn Virginia Resource Partners, L.P.
(“PVR”), a publicly traded Delaware limited partnership.  As of
September 30, 2009, the equity interests are (1) a 2% general partner interest
in PVR, which we hold through our 100% ownership interest in Penn Virginia
Resource GP, LLC, PVR’s general partner, (2) all of the incentive distribution
rights (“IDRs”) in PVR, which we hold through our 100% ownership interest in
PVR’s general partner and (3) an approximately 37% limited partner interest in
PVR.  With the IDRs, we receive an increasing percentage of PVR’s
quarterly distributions of available cash from operating surplus after certain
levels of cash distributions have been achieved.  Our only cash
generating assets consist of our equity interests in PVR.  Due to our
control of the general partner of PVR, the financial results of PVR are included
in our condensed consolidated financial statements.  However, PVR
functions with a capital structure that is independent of ours, consisting of
its own debt instruments and publicly traded common units.





Our
general partner is an indirect wholly owned subsidiary of Penn Virginia
Corporation (“Penn Virginia”).  As of September 30, 2009, Penn
Virginia and its subsidiaries owned an approximately 51% limited partner
interest in us.





PVR
currently conducts operations in two business segments:  (i) coal and
natural resource management and (ii) natural gas midstream.




We,
through our ownership of the general partner of PVR, manage the operations and
activities of PVR.  Most of PVR’s personnel are employees of Penn
Virginia or its affiliates.  PVR’s general partner is liable for all
of PVR’s debts, to the extent not paid from PVR’s assets, except for
indebtedness or other obligations that are made specifically non-recourse to
it.




We do not
receive any management fee or other compensation for the management of
PVR.  We and our affiliates are reimbursed for expenses incurred on
PVR’s behalf.  These expenses include the costs of employee, officer
and director compensation and benefits properly allocable to PVR and all other
expenses necessary or appropriate to conduct the business of, and allocable to,
PVR.  PVR’s partnership agreement provides that PVR’s general partner
will determine the expenses that are allocable to PVR in any reasonable manner
determined by PVR in its sole discretion.




2.    Basis
of Presentation




Unless
otherwise indicated, for the purposes of our condensed consolidated financial
statements, the “Partnership,” “we,” “us” or “our” refers to Penn Virginia GP
Holdings, L.P. and subsidiaries.





Our
condensed consolidated financial statements include the accounts of the
Partnership, PVR and all of PVR’s wholly owned
subsidiaries.  Investments in non-controlled entities over which we
exercise significant influence are accounted for using the equity
method.  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.  These statements involve 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 our consolidated financial
statements and footnotes included in our Annual Report on Form 10-K for the year
ended December 31, 2008.  Operating results for the three and nine
months ended September 30, 2009 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2009.  Certain
reclassifications have been made to conform to the current period’s
presentation.  In preparing the accompanying condensed consolidated
financial statements, we have evaluated subsequent events through November 5,
2009.




4





3. Fair Value
Measurements




Effective
January 1, 2009, we adopted the new accounting standard on fair value
measurements and disclosures applicable to both our financial and nonfinancial
assets and liabilities that are measured and reported on a fair value
basis.  Our financial instruments that are subject to fair value
disclosures consist of cash and cash equivalents, accounts receivable, accounts
payable, derivative instruments and PVR’s long-term debt.  We have
followed consistent methods and assumptions to estimate the fair values as more
fully described in our Annual Report on Form 10-K for the year ended December
31, 2008.  At September 30, 2009, the carrying values of all of these
financial instruments approximated fair value.




The
following table summarizes the valuation of certain assets and liabilities by
category as of September 30, 2009 (in thousands):




Fair
      Value Measurements at September 30, 2009,
    UsingDescription
                
                Fair Value
                  Measurements at
                  September 30, 2009
                
                
                Quoted Prices in
                  Active Markets for
                  Identical Assets
                  (Level 1)
                
                
                Significant Other
                  Observable Inputs
                  (Level 2)
                
                
                Significant
                  Unobservable
                  Inputs (Level 3)Interest
      rate swap assets - noncurrent
                
                $
                1,138
                
                
                $
                -
                
                
                $
                1,138
                
                
                $
                -Interest
      rate swap liabilities - current
                
                
                (8,188
                )
                
                
                -
                
                
                
                (8,188
                )
                
                
                -Interest
      rate swap liabilities - noncurrent
                
                
                (4,117
                )
                
                
                -
                
                
                
                (4,117
                )
                
                
                -Commodity
      derivative assets - current
                
                
                7,322
                
                
                
                -
                
                
                
                7,322
                
                
                
                -Commodity
      derivative assets - noncurrent
                
                
                417
                
                
                
                -
                
                
                
                417
                
                
                
                -Commodity
      derivative liabilities - current
                
                
                (2,712
                )
                
                
                -
                
                
                
                (2,712
                )
                
                
                -Commodity
      derivative liabilities - noncurrent
                
                
                (206
                )
                
                
                -
                
                
                
                (206
                )
                
                
                -Total
                
                $
                (6,346
                )
                
                $
                -
                
                
                $
                (6,346
                )
                
                $
                -





See Note
4, “Derivative Instruments,” for the effects of derivative instruments on our
condensed consolidated financial statements.





4.    Derivative
Instruments





PVR
Natural Gas Midstream Segment Commodity Derivatives





PVR
determines the fair values of its derivative agreements using quoted forward
prices for the respective commodities as of the end of the reporting period and
discount rates adjusted for the credit risk of PVR’s counterparties if the
derivative is in an asset position and PVR’s own credit risk if the derivative
is in a liability position.  The following table sets forth PVR’s
positions as of September 30, 2009 for commodities related to natural gas
midstream revenues and cost of midstream gas purchased:





Average
                  
                  
                  
                  
                  
                  Weighted
      Average PriceVolume
      Per
                  
                  
                  
                  
                  
                  Additional
      Put
                  
                  
                  
                  
                  
                  
                  
                  
                  Fair
      Value atDay
                  
                  
                  Swap
      Price
                  
                  
                  Option
                  
                  
                  Put
                  
                  
                  Call
                  
                  
                  September
      30, 2009(in
      thousands)Crude
      Oil Three-Way Collar
                  
                  (barrels)
                  
                  
                  
                  
                  
                  
                  
                  
                  ($
      per barrel)Fourth
      Quarter 2009
                  
                  
                  1,000
                  
                  
                  
                  
                  
                  
                  70.00
                  
                  
                  
                  90.00
                  
                  
                  
                  119.25
                  
                  
                  $
                  1,433Frac
      Spread Collar
                  
                  (MMBtu)
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  ($
      per MMBtu)Fourth
      Quarter 2009
                  
                  
                  6,000
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  9.09
                  
                  
                  
                  13.94
                  
                  
                  
                  864Crude
      Oil Collar
                  
                  (barrels)
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  ($
      per barrel)First
      Quarter 2010 through Fourth Quarter 2010
                  
                  
                  750
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  70.00
                  
                  
                  
                  81.25
                  
                  
                  
                  228First
      Quarter 2010 through Fourth Quarter 2010
                  
                  
                  1,000
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  68.00
                  
                  
                  
                  80.00
                  
                  
                  
                  (155
                  )Natural
      Gas Purchase Swap
                  
                  (MMBtu)
                  
                  
                  ($
      per MMbtu)First
      Quarter 2010 through Fourth Quarter 2010
                  
                  
                  5,000
                  
                  
                  
                  5.815
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  709Settlements
      to be received in subsequent period
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  1,742Natural
      gas midstream segment commodity derivatives - net asset
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  $
                  4,821





See the
“Financial Statement Impact of Derivatives”section below for the
impact of PVR’s natural gas midstream commodity derivatives on our condensed
consolidated financial statements.




5





PVR
Interest Rate Swaps





PVR has
entered into interest rate swaps (the “PVR Interest Rate Swaps”) to establish
fixed interest rates on a portion of the outstanding borrowings under its
revolving credit facility (the “PVR Revolver”).  The following table
sets forth the PVR Interest Rate Swap positions at September 30,
2009:




Dates
                  
                  Notional Amounts
                  
                  
                  Weighted-Average Fixed Rate(in
      millions)Until
      March 2010
                  
                  $
                  310.0
                  
                  
                  
                  3.54
                  %March
      2010 - December 2011
                  
                  $
                  250.0
                  
                  
                  
                  3.37
                  %December
      2011 - December 2012
                  
                  $
                  100.0
                  
                  
                  
                  2.09
                  %





During
the first quarter of 2009, PVR discontinued hedge accounting for all of the PVR
Interest Rate Swaps.  Accordingly, subsequent fair value gains and
losses for the PVR Interest Rate Swaps are recognized in the derivatives line
item on our condensed consolidated statements of income.  At September
30, 2009, a $2.2 million loss remained in accumulated other comprehensive income
(“AOCI”) related to the PVR Interest Rate Swaps.  The $2.2 million
loss will be recognized in interest expense as the PVR Interest Rate Swaps
settle.




PVR
reported a (i) net derivative liability of $11.2 million at September 30, 2009
and (ii) loss in AOCI of $2.2 million at September 30, 2009 related to the PVR
Interest Rate Swaps.  In connection with periodic settlements, PVR
reclassified a total of $2.6 million of net hedging losses on the PVR Interest
Rate Swaps from AOCI to interest expense during the nine months ended September
30, 2009.  See the “Financial Statement Impact of Derivatives”section below for the
impact of the PVR Interest Rate Swaps on our condensed consolidated financial
statements.




Financial
Statement Impact of Derivatives




The
following table summarizes the effects of PVR’s derivative activities, as well
as the location of the gains and losses, on our condensed consolidated
statements of income for the three and nine months ended September 30, 2009 and
2008 (in thousands):




Location of gain (loss)on derivatives recognized
                    
                    Three Months Ended September 30,
                    
                    
                    Nine Months Ended September 30,in
      income
                    
                    2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Derivatives
      de-designated as hedging instruments:Interest
      rate contracts  (1)
                    
                    Interest
      expense
                    
                    $
                    (857
                    )
                    
                    $
                    (854
                    )
                    
                    $
                    (2,600
                    )
                    
                    $
                    (1,213
                    )Decrease
      in net income resulting from derivatives de-designated as hedging
      instruments
                    
                    
                    
                    $
                    (857
                    )
                    
                    $
                    (854
                    )
                    
                    $
                    (2,600
                    )
                    
                    $
                    (1,213
                    )Derivatives
      not designated as hedging instruments:Interest
      rate contracts
                    
                    Derivatives
                    
                    $
                    (3,947
                    )
                    
                    $
                    (1,333
                    )
                    
                    $
                    (3,251
                    )
                    
                    $
                    (1,333
                    )Commodity
      contracts
                    
                    Derivatives
                    
                    
                    1,137
                    
                    
                    
                    15,572
                    
                    
                    
                    (8,754
                    )
                    
                    
                    (9,219
                    )Decrease
      in net income resulting from derivatives not designated as hedging
      instruments
                    
                    
                    
                    $
                    (2,810
                    )
                    
                    $
                    14,239
                    
                    
                    $
                    (12,005
                    )
                    
                    $
                    (10,552
                    )Total
      decrease in net income resulting from derivatives
                    
                    
                    
                    $
                    (3,667
                    )
                    
                    $
                    13,385
                    
                    
                    $
                    (14,605
                    )
                    
                    $
                    (11,765
                    )Realized
      and unrealized derivative impact:Cash
      received (paid) for commodity and interest rate contract
      settlements
                    
                    Derivatives
                    
                    
                    (314
                    )
                    
                    
                    (14,054
                    )
                    
                    
                    4,135
                    
                    
                    
                    (33,279
                    )Cash
      paid for interest rate contract settlements
                    
                    Interest
      expense
                    
                    
                    -
                    
                    
                    
                    (854
                    )
                    
                    
                    (370
                    )
                    
                    
                    (1,213
                    )Unrealized
      derivative losses (2)
                    
                    
                    
                    
                    (3,353
                    )
                    
                    
                    28,293
                    
                    
                    
                    (18,370
                    )
                    
                    
                    22,727Total
      decrease in net income resulting from derivatives
                    
                    
                    
                    $
                    (3,667
                    )
                    
                    $
                    13,385
                    
                    
                    $
                    (14,605
                    )
                    
                    $
                    (11,765
                    )





(1)
            Represents
      amounts reclassified out of AOCI and into interest expense.  At
      September 30, 2009, a $2.2 million loss remained in AOCI related to the
      PVR Interest Rate Swaps on which PVR discontinued hedge
      accounting.




(2)
            Represents
      net unrealized gains (losses) in the natural gas midstream, cost of
      midstream gas purchased, interest expense and derivatives line items on
      our condensed consolidated statements of income.  For the three
      months ended September 30, 2009, the net unrealized derivative losses were
      composed of a $2.5 million unrealized loss on the PVR Interest Rate Swaps
      and a $0.9 million unrealized loss on PVR’s commodity
      derivatives.  For the nine months ended September 30, 2009, the
      net unrealized derivative losses were composed of a $0.5 million
      unrealized loss on the PVR Interest Rates Swaps and a $17.9 million
      unrealized loss on PVR’s commodity
derivatives.




6




The
following table summarizes the fair value of PVR’s derivative instruments, as
well as the locations of these instruments, on our condensed consolidated
balance sheets as of September 30, 2009 and December 31, 2008 (in
thousands):




Fair values as of September 30,2009
                                                    
                                                    
                                                    Fair values as of December 31, 2008Balance Sheet Location
                                                    
                                                    Derivative Assets
                                                    
                                                    
                                                    Derivative
                                                      Liabilities
                                                    
                                                    
                                                    Derivative
                                                      Assets
                                                    
                                                    
                                                    Derivative
                                                      LiabilitiesDerivatives
      de-designated as hedging instruments:Interest
      rate contracts
                                                    
                                                    Derivative liabilities - current
                                                    
                                                    $
                                                    -
                                                    
                                                    
                                                    $
                                                    -
                                                    
                                                    
                                                    $
                                                    -
                                                    
                                                    
                                                    $
                                                    1,228Interest
      rate contracts
                                                    
                                                    Derivative
      liabilities -  noncurrent
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    1,842Total
      derivatives de-designated as hedging instruments
                                                    
                                                    $
                                                    -
                                                    
                                                    
                                                    $
                                                    -
                                                    
                                                    
                                                    $
                                                    -
                                                    
                                                    
                                                    $
                                                    3,070Derivatives
      not designated as hedging instruments:Interest
      rate contracts
                                                    
                                                    Derivative
      assets/liabilities - current
                                                    
                                                    $
                                                    -
                                                    
                                                    
                                                    $
                                                    8,188
                                                    
                                                    
                                                    $
                                                    -
                                                    
                                                    
                                                    $
                                                    4,663Interest
      rate contracts
                                                    
                                                    Derivative assets/liabilities - noncurrent
                                                    
                                                    
                                                    1,138
                                                    
                                                    
                                                    
                                                    4,117
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    5,073Commodity
      contracts
                                                    
                                                    Derivative
      assets/liabilities - current
                                                    
                                                    
                                                    7,322
                                                    
                                                    
                                                    
                                                    2,712
                                                    
                                                    
                                                    
                                                    30,431
                                                    
                                                    
                                                    
                                                    7,694Commodity
      contracts
                                                    
                                                    Derivative assets/liabilities - noncurrent
                                                    
                                                    
                                                    417
                                                    
                                                    
                                                    
                                                    206
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Total
      derivatives not designated as hedging instruments
                                                    
                                                    $
                                                    8,877
                                                    
                                                    
                                                    $
                                                    15,223
                                                    
                                                    
                                                    $
                                                    30,431
                                                    
                                                    
                                                    $
                                                    17,430Total
      fair value of derivative instruments
                                                    
                                                    
                                                    
                                                    $
                                                    8,877
                                                    
                                                    
                                                    $
                                                    15,223
                                                    
                                                    
                                                    $
                                                    30,431
                                                    
                                                    
                                                    $
                                                    20,500





See Note
3, “Fair Value Measurements,” for a description of how the above-described
financial instruments are valued.




The
following table summarizes our interest expense for the three and nine months
ended September 30, 2009 and 2008, including the effect of the PVR Interest Rate
Swaps (in thousands):




Three Months Ended September
      30,
                
                
                Nine Months Ended September
    30,Source
                
                2009
                
                
                2008
                
                
                2009
                
                
                2008Interest
      on borrowings
                
                $
                5,648
                
                
                $
                6,206
                
                
                $
                16,112
                
                
                $
                16,828Capitalized
      interest
                
                
                -
                
                
                
                -
                
                
                
                (226
                )
                
                
                (675
                )Interest
      rate swaps
                
                
                857
                
                
                
                854
                
                
                
                2,600
                
                
                
                1,213Total
      interest expense
                
                $
                6,505
                
                
                $
                7,060
                
                
                $
                18,486
                
                
                $
                17,366




At
September 30, 2009, we reported a commodity derivative asset related to the PVR
natural gas midstream segment of $4.8 million.  The contracts
underlying such commodity derivative asset are with four counterparties, all of
which are investment grade financial institutions, and such commodity derivative
asset is substantially concentrated with one 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.  PVR
neither paid nor received collateral with respect to its derivative
positions.  The maximum amount of loss due to credit risk if
counterparties to PVR’s 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 September 30, 2009.  No significant uncertainties related to the
collectability of amounts owed to PVR exist with regard to these
counterparties.





The
above-described hedging activity represents cash flow hedges.  As of
September 30, 2009, neither we nor PVR owned any derivative instruments that
were classified as fair value hedges or trading securities or that contained
credit risk contingencies.




5.    Long-Term
Debt




In March
2009, PVR increased the size of the PVR Revolver from $700.0 million to $800.0
million, which resulted in $9.3 million of debt issuance costs that will be
amortized over the remaining life of the PVR Revolver.  The PVR
Revolver is secured with substantially all of PVR’s assets.  The
December 2011 maturity date for the PVR Revolver did not change.  As
of September 30, 2009, all of PVR’s long-term debt was indebtedness outstanding
under the PVR Revolver.  PVR’s debt is non-recourse to
us.  Interest is payable at a base rate plus an applicable margin of
up to 1.25% if PVR selects the base rate borrowing option under the PVR
Revolver, or at a rate derived from the London Interbank Offered Rate (“LIBOR”)
plus an applicable margin ranging from 1.75% to 2.75% if PVR selects the
LIBOR-based borrowing option.  As of September 30, 2009 and December
31, 2008, the weighted average interest rate on borrowings outstanding under the
PVR Revolver was approximately 2.5% and 3.2%.




7




6.    Noncontrolling
Interests




Effective
January 1, 2009, we adopted the new accounting standard on noncontrolling
interests.  This standard requires that the noncontrolling interests
in PVR be reported on our condensed consolidated balance sheets as a separate
item within partners’ capital.  Net income attributable to the
noncontrolling interests in PVR is separately presented on the face of our
condensed consolidated statements of income.  Our condensed
consolidated financial statements have been retroactively adjusted to reflect
the adoption of this standard.  Comprehensive income attributable to
the noncontrolling interests in PVR is separately presented in our schedule of
comprehensive income.  This standard also requires that gains from the
sales of subsidiary units be recorded directly to partners’
capital.  If we sell sufficient controlling interests in our
subsidiaries to require deconsolidation of those subsidiaries, then we expect to
record a gain or loss on our condensed consolidated statements of
income.




The
following is a reconciliation of the carrying amount of partners’ capital
attributable to us, partners’ capital attributable to the noncontrolling
interests in PVR and total partners’ capital (in thousands):




Penn Virginia GP
                  Holdings, L.P.
                  Unitholders
                
                
                Noncontrolling
                  Interests
                
                
                Total
                
                
                Comprehensive
                  Income (Loss)Balance
      at December 31, 2008
                
                $
                269,542
                
                
                $
                268,981
                
                
                $
                538,523Distributions
      paid
                
                
                (44,544
                )
                
                
                (45,753
                )
                
                
                (90,297
                )Unit
      based compensation
                
                
                -
                
                
                
                1,500
                
                
                
                1,500Comprehensive
      income:Net
      income
                
                
                25,360
                
                
                
                14,327
                
                
                
                39,687
                
                
                
                39,687Unrealized
      losses on derivative activities
                
                
                (196
                )
                
                
                (310
                )
                
                
                (506
                )
                
                
                (506
                )Reclassification
      adjustments for derivative activities
                
                
                1,567
                
                
                
                1,033
                
                
                
                2,600
                
                
                
                2,600Balances
      at September 30, 2009
                
                $
                251,729
                
                
                $
                239,778
                
                
                
                491,507
                
                
                $
                41,781Balance
      at December 31, 2007
                
                $
                224,502
                
                
                $
                156,957
                
                
                
                381,459Distributions
      paid
                
                
                (39,856
                )
                
                
                (38,419
                )
                
                
                (78,275
                )Unit
      price adjustment for PVG units per EITF 99-12
                
                
                2,474
                
                
                
                -
                
                
                
                2,474PVR
      issuance of units
                
                
                -
                
                
                
                157,109
                
                
                
                157,109Recognition
      of SAB 51 gain
                
                
                43,522
                
                
                
                (43,522
                )
                
                
                -Comprehensive
      income:Net
      income
                
                
                43,128
                
                
                
                43,878
                
                
                
                87,006
                
                
                
                87,006Unrealized
      losses on derivative activities
                
                
                (681
                )
                
                
                (498
                )
                
                
                (1,179
                )
                
                
                (1,179
                )Reclassification
      adjustments for derivative activities
                
                
                2,083
                
                
                
                3,111
                
                
                
                5,194
                
                
                
                5,194Balances
      at September 30, 2008
                
                $
                275,172
                
                
                $
                278,616
                
                
                $
                553,788
                
                
                $
                91,021





7.    Cash
Distributions




The
following table reflects the allocation of total cash distributions paid by us
during the three and nine months ended September 30, 2009 and 2008 (in
thousands, except per unit data):




Three Months Ended September
      30,
                
                
                Nine Months Ended September
    30,Unitholders
                
                2009
                
                
                2008
                
                
                2009
                
                
                2008Public
      unitholders
                
                $
                3,419
                
                
                $
                3,239
                
                
                $
                10,257
                
                
                $
                7,850Penn
      Virginia Corporation
                
                
                11,429
                
                
                
                10,828
                
                
                
                34,287
                
                
                
                32,006Total
      cash distributions paid
                
                $
                14,848
                
                
                $
                14,067
                
                
                $
                44,544
                
                
                $
                39,856Total
      cash distributions paid per unit
                
                $
                0.38
                
                
                $
                0.36
                
                
                $
                1.14
                
                
                $
                1.02




On
November 18, 2009, we will pay a $0.38 per unit quarterly distribution to
unitholders of record on November 6, 2009.  This per unit distribution
will remain unchanged from the previous distribution paid on August 20,
2009.




8




8.    Related-Party
Transactions





General
and Administrative




Penn
Virginia charges us and PVR for certain corporate administrative expenses which
are allocable to us and PVR and its subsidiaries.  When allocating
general corporate expenses, consideration is given to property and equipment,
payroll and general corporate overhead.  Any direct costs are paid by
us or PVR, as applicable.  Total corporate administrative expenses
charged to us, PVR and PVR’s subsidiaries totaled $1.7 million for both the
three months ended September 30, 2009 and 2008 and $5.0 million for both the
nine months ended September 30, 2009 and 2008.  Of these amounts, Penn
Virginia charged us $0.1 million and $0.2 million for the three months ended
September 30, 2009 and 2008 and $0.3 million and $0.4 million for the nine
months ended September 30, 2009 and 2008 and charged PVR $1.6 million and $1.5
million for the three months ended September 30, 2009 and 2008 and $4.7 million
and $4.6 million for the nine months ended September 30, 2009 and
2008.  These costs are reflected in the general and administrative
expenses line item on our condensed consolidated statements of
income.  At least annually, our management performs an analysis of
general corporate expenses based on time allocations of shared employees and
other pertinent factors.  Based on this analysis, our management
believes that the allocation methodologies used are reasonable.





Accounts
Payable—Affiliate




Amounts
payable to related parties totaled $4.3 million and $8.1 million as of September
30, 2009 and December 31, 2008.  These amounts are primarily due to a
wholly owned subsidiary of Penn Virginia, Penn Virginia Oil & Gas, L.P.
(“PVOG LP”), and are related to the natural gas gathering and processing
agreement between PVR East Texas Gas Processing, LLC (“PVR East Texas”), PVR’s
wholly owned subsidiary, and PVOG LP.  See “—Gathering and Processing
Revenues.”  These balances are included in the accounts payable line
item on our condensed consolidated balance sheets.




Marketing
Revenues




PVOG LP
and Connect Energy Services, LLC (“Connect Energy”), a wholly owned subsidiary
of PVR, are parties to a Master Services Agreement effective September 1,
2006.  Pursuant to the Master Services Agreement, Connect Energy
markets all of PVOG LP’s oil and gas production in Arkansas, Louisiana, Oklahoma
and Texas for a fee equal to 1% of the net sales price (subject to specified
limitations) received by PVOG LP for such production.  The Master
Services Agreement has a primary term of five years and automatically renews for
additional one-year terms until terminated by either party.  Under the
Master Services Agreement, PVOG LP paid fees to Connect Energy of $0.3 million
and $1.0 million for the three months ended September 30, 2009 and 2008 and $1.1
million and $2.5 million for the nine months ended September 30, 2009 and
2008.  These marketing revenues are included in the other revenues
line item on our condensed consolidated statements of income.




Gathering
and Processing Revenues




PVR East
Texas and PVOG LP are parties to a Gas Gathering and Processing Agreement
effective May 1, 2007.  Pursuant to the Gas Gathering and Processing
Agreement, PVR East Texas gathers and processes all of PVOG LP’s current and
future gas production in certain areas of the Bethany Field in East Texas and
redelivers the natural gas liquids (“NGLs”) to PVOG LP for a $0.31 per one
million British thermal units (MMBtu) service fee (with an annual CPI
adjustment).  The Gas Gathering and Processing Agreement has a primary
term ending August 31, 2021 and automatically renews for additional
one-year terms until terminated by either party.  PVR East Texas began
gathering and processing PVOG LP’s gas in September 2008.  Pursuant to
the Gas Gathering and Processing Agreement, PVOG LP paid fees to PVR East Texas
of $1.1 million and $0.7 million for the three months ended September 30, 2009
and 2008 and $3.2 million and $1.4 million in fees for the nine months ended
September 30, 2009 and 2008.  These gathering and processing revenues
are recorded in the natural gas midstream revenues line item on our condensed
consolidated statements of income.




9




Gas
Purchases and Sales




From time
to time, PVOG LP sells gas or NGLs to Connect Energy at PVR’s Crossroads plant,
and Connect Energy transports them to the marketing location and then resells
them to third parties.  The sales price received by PVOG LP from Connect
Energy for such gas or NGLs equals the sales price received by Connect Energy
for such gas or NGLs from the third parties.  These purchase and sale
transactions do not impact our gross margin, nor do they impact our operating
income.  In the three months ended September 30, 2009 and 2008, PVR
recorded $15.1 million and $55.7 million of natural gas midstream revenues and
$15.1 million and $55.7 million for the cost of midstream gas purchased related
to the purchase of natural gas from PVOG LP and the subsequent sale of that gas
to third parties.  In the nine months ended September 30, 2009 and
2008, PVR recorded $56.4 million and $105.5 million of natural gas midstream
revenues and $56.4 million and $105.5 million for the cost of midstream gas
purchased related to the purchase of natural gas from PVOG LP and the subsequent
sale of that gas to third parties.  PVR takes title to the gas and
NGLs prior to transporting them to third parties.




9.    Unit-Based
Compensation





The Penn
Virginia Resource GP, LLC Fifth Amended and Restated Long-Term Incentive Plan
(the “PVR LTIP”) permits the grant of common units, deferred common units,
restricted units and phantom units to employees and directors of its general
partner and its affiliates.  PVR recognized compensation expense of
$1.1 million and $0.8 million for the three months ended September 30, 2009 and
2008 and $3.9 million and $2.4 million for the nine months ended September 30,
2009 and 2008 related to the granting of common and deferred common units under
the PVR LTIP and the vesting of restricted units and phantom units granted under
the PVR LTIP.  Common units and deferred common units granted under
the LTIP are immediately vested, and PVR recognizes compensation expense related
to those grants on the grant date.  Restricted units and phantom units
granted under the PVR LTIP vest over a three-year period, with one-third vesting
in each year, and PVR recognizes compensation expense related to those grants on
a straight-line basis over the vesting period.





The PVG
GP, LLC Amended and Restated Long-Term Incentive Plan (the “PVG LTIP”) likewise
permits the grant of common units, deferred common units, restricted units and
phantom units to its employees and directors of its general partner and
affiliates.  We recognized compensation expense of $0.1 million for
both the three months ended September 30, 2009 and 2008 and $0.3 million for
both the nine months ended September 30, 2009 and 2008 related to the granting
of deferred common units under the PVG LTIP.





Our and
PVR’s compensation expenses are recorded in the general and administrative
expenses line item on our condensed consolidated statements of
income.





10.    Commitments
and Contingencies





Legal





We and
PVR 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 or
results of operations.




Environmental
Compliance





As of
September 30, 2009 and December 31, 2008, PVR’s environmental liabilities were
$1.1 million and $1.2 million, which represents PVR’s best estimate of the
liabilities as of those dates related to its coal and natural resource
management and natural gas midstream businesses.  PVR has reclamation
bonding requirements with respect to certain unleased and inactive
properties.  Given the uncertainty of when a reclamation area will
meet regulatory standards, a change in this estimate could occur in the
future.




10




Mine
Health and Safety Laws





There are
numerous mine health and safety laws and regulations applicable to the coal
mining industry.  However, since PVR does not operate any mines and
does not employ any coal miners, PVR is not subject to such laws and
regulations.  Accordingly, we have not accrued any related
liabilities.




Customer
Credit Risk




For the
nine months ended September 30, 2009, two PVR natural gas midstream segment
customers accounted for $83.0 million and $49.2 million, or 18% and 11%, of our
total consolidated revenues.  At September 30, 2009, 23% of our
consolidated accounts receivable related to these customers.




11.    Segment
Information





Our
reportable segments are as follows:




·
            PVR
      Coal and Natural Resource Management—leasing of coal properties in
      exchange for royalty payments and other land management
      activities.




·
            PVR
      Natural Gas Midstream—natural gas processing, gathering and other related
      services.




The
corporate and other line item primarily represents corporate
functions.


11


The
following tables present a summary of certain financial information relating to
our segments for the three and nine months ended September 30, 2009 and 2008 and
as of September 30, 2009 and December 31, 2008 (in thousands):




Revenues
                      
                      
                      Operating
      income (loss)Three
      Months Ended September
      30,
                      
                      
                      Three
      Months Ended September 30,2009
                      
                      
                      2008
                      
                      
                      2009
                      
                      
                      2008Coal
      and natural resource management
                      
                      $
                      35,179
                      
                      
                      $
                      41,660
                      
                      
                      $
                      21,225
                      
                      
                      $
                      26,295Natural
      gas midstream
                      
                      
                      120,446
                      
                      
                      
                      243,616
                      
                      
                      
                      6,591
                      
                      
                      
                      13,728Corporate
      and other
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (879
                      )
                      
                      
                      (540
                      )Consolidated
      totals
                      
                      $
                      155,625
                      
                      
                      $
                      285,276
                      
                      
                      $
                      26,937
                      
                      
                      $
                      39,483Interest
      expense
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (6,505
                      )
                      
                      
                      (7,060
                      )Other
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      344
                      
                      
                      
                      (4,118
                      )Derivatives
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (2,810
                      )
                      
                      
                      15,742Net
      income attributable to noncontrolling interests
                      
                      
                      
                      
                      
                      
                      
                      (7,794
                      )
                      
                      
                      (23,783
                      )Net
      income attributable to Penn Virginia GP Holdings, L.P.
                      
                      
                      
                      
                      
                      
                      $
                      10,172
                      
                      
                      $
                      20,264





Additions
      to property and equipment
                                                                
                                                                
                                                                DD&A
      expensesThree
      Months Ended September 30,
                                                                
                                                                
                                                                Three
      Months Ended September 30,2009
                                                                
                                                                
                                                                2008
                                                                
                                                                
                                                                2009
                                                                
                                                                
                                                                2008Coal
      and natural resource management
                                                                
                                                                $
                                                                140
                                                                
                                                                
                                                                $
                                                                497
                                                                
                                                                
                                                                $
                                                                7,999
                                                                
                                                                
                                                                $
                                                                8,794Natural
      gas midstream
                                                                
                                                                
                                                                39,031
                                                                
                                                                
                                                                
                                                                172,356
                                                                
                                                                
                                                                
                                                                9,852
                                                                
                                                                
                                                                
                                                                8,109Consolidated
      totals
                                                                
                                                                $
                                                                39,171
                                                                
                                                                
                                                                $
                                                                172,853
                                                                
                                                                
                                                                $
                                                                17,851
                                                                
                                                                
                                                                $
                                                                16,903Revenues
                                                                
                                                                
                                                                Operating
      income (loss)Nine
      Months Ended September 30,
                                                                
                                                                
                                                                Nine
      Months Ended September 30,2009
                                                                
                                                                
                                                                2008
                                                                
                                                                
                                                                2009
                                                                
                                                                
                                                                2008Coal
      and natural resource management
                                                                
                                                                $
                                                                108,575
                                                                
                                                                
                                                                $
                                                                111,010
                                                                
                                                                
                                                                $
                                                                66,532
                                                                
                                                                
                                                                $
                                                                67,860Natural
      gas midstream
                                                                
                                                                
                                                                353,228
                                                                
                                                                
                                                                
                                                                607,585
                                                                
                                                                
                                                                
                                                                4,604
                                                                
                                                                
                                                                
                                                                47,726Corporate
      and other
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                (1,978
                                                                )
                                                                
                                                                
                                                                (1,718
                                                                )Consolidated
      totals
                                                                
                                                                $
                                                                461,803
                                                                
                                                                
                                                                $
                                                                718,595
                                                                
                                                                
                                                                $
                                                                69,158
                                                                
                                                                
                                                                $
                                                                113,868Interest
      expense
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                (18,486
                                                                )
                                                                
                                                                
                                                                (17,366
                                                                )Other
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                1,020
                                                                
                                                                
                                                                
                                                                (3,072
                                                                )Derivatives
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                (12,005
                                                                )
                                                                
                                                                
                                                                (6,424
                                                                )Net
      income attributable to noncontrolling interests
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                (14,327
                                                                )
                                                                
                                                                
                                                                (43,878
                                                                )Net
      income attributable to Penn Virginia GP Holdings, L.P.
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                $
                                                                25,360
                                                                
                                                                
                                                                $
                                                                43,128Additions
      to property and equipment
                                                                
                                                                
                                                                DD&A
      expensesNine
      Months Ended September 30,
                                                                
                                                                
                                                                Nine
      Months Ended September 30,2009
                                                                
                                                                
                                                                2008
                                                                
                                                                
                                                                2009
                                                                
                                                                
                                                                2008Coal
      and natural resource management
                                                                
                                                                $
                                                                2,046
                                                                
                                                                
                                                                $
                                                                25,186
                                                                
                                                                
                                                                $
                                                                23,557
                                                                
                                                                
                                                                $
                                                                22,733Natural
      gas midstream
                                                                
                                                                
                                                                71,245
                                                                
                                                                
                                                                
                                                                282,747
                                                                
                                                                
                                                                
                                                                28,414
                                                                
                                                                
                                                                
                                                                18,589Consolidated
      totals
                                                                
                                                                $
                                                                73,291
                                                                
                                                                
                                                                $
                                                                307,933
                                                                
                                                                
                                                                $
                                                                51,971
                                                                
                                                                
                                                                $
                                                                41,322Total
      assets atSeptember
      30, 2009
                                                                
                                                                
                                                                December
      31, 2008Coal
      and natural resource management
                                                                
                                                                $
                                                                568,829
                                                                
                                                                
                                                                $
                                                                600,418Natural
      gas midstream
                                                                
                                                                
                                                                639,966
                                                                
                                                                
                                                                
                                                                618,402Corporate
      and other
                                                                
                                                                
                                                                9,979
                                                                
                                                                
                                                                
                                                                8,854Consolidated
      totals
                                                                
                                                                $
                                                                1,218,774
                                                                
                                                                
                                                                $
                                                                1,227,674
  12




12.New
Accounting Standards





In
September 2009, the Financial Accounting Standards Board issued guidance on how
to measure the fair value of a liability when a quoted price in an active market
for the identical liability is not available.  It also includes other
clarifications and examples of how to measure the fair value of certain
liabilities, including those that have limited or no observable data.  We
do not expect the guidance to have a material impact on our condensed
consolidated financial statements, and we will adopt it on its effective date of
December 31, 2009.


13


Item
2    Management’s Discussion and Analysis
of Financial Condition and Results of Operations




The
following discussion and analysis of the financial condition and results of
operations of Penn Virginia GP Holdings, L.P. and its subsidiaries (the
“Partnership,” “we,” “us” or “our”) should be read in conjunction with our
condensed consolidated financial statements and the accompanying notes in Item
1, “Financial Statements.”





Overview
of Our Business




General




We are a
publicly traded Delaware limited partnership formed in June 2006.  Our
only cash generating assets consist of our interests in Penn Virginia Resource
Partners, L.P., or PVR, which consist of the following:




·
            a
      2% general partner interest in PVR, which we hold through our 100%
      ownership interest in Penn Virginia Resource GP, LLC, PVR’s general
      partner;




·
            all
      of the incentive distribution rights, or IDRs, in PVR, which we hold
      through our 100% ownership interest in PVR’s general partner;
      and




·
            19,587,049
      common units of PVR, representing an approximately 37% limited partner
      interest in PVR.





All of
our cash flows are generated from the cash distributions we receive with respect
to the PVR equity interests we own.  PVR is required by its
partnership agreement to distribute, and it has historically distributed within
45 days of the end of each quarter, all of its cash on hand at the end of each
quarter, less cash reserves established by its general partner in its sole
discretion to provide for the proper conduct of PVR’s business or to provide for
future distributions.  While we, like PVR, are structured as a limited
partnership, our capital structure and cash distribution policy differ
materially from those of PVR.  Most notably, our general partner does
not have an economic interest in us and is therefore not entitled to receive any
distributions from us, and our capital structure does not include
IDRs.  Accordingly, our distributions are allocated exclusively to our
common units.




Because
we control the general partner of PVR, the financial results of PVR are included
in our condensed consolidated financial statements.  However, we and
PVR both function with capital structures that are independent of each other,
with both of us having publicly traded common units and PVR having its own debt
instruments.  We do not have any debt instruments on a stand-alone
basis.




Financial
Presentation




We
reflect our ownership interest in PVR on a consolidated basis, which means that
our financial results are combined with PVR’s financial results.  The
approximately 61% limited partner interest in PVR that we do not own, after the
effect of IDRs, is reflected as noncontrolling interests in our results of
operations.  We have no separate operating activities apart from those
conducted by PVR, and our cash flows currently consist of distributions from PVR
on the partner interests, including the IDRs, that we
own.  Accordingly, the discussion and analysis of our financial
position and results of operations in this “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” reflects the operating
activities and results of operations of PVR.




Overview
of PVR’s Business




PVR is a
publicly traded Delaware limited partnership formed by Penn Virginia Corporation
in 2001 that is principally engaged in the management of coal and natural
resource properties and the gathering and processing of natural gas in the
United States.




14




Selected
Financial Data – Consolidated




The
following table presents summary operating results for the three and nine months
ended September 30, 2009 and 2008 (in thousands):




Three Months Ended September
      30,
                
                
                Nine Months Ended September
    30,2009
                
                
                2008
                
                
                2009
                
                
                2008Revenues
                
                $
                155,625
                
                
                $
                285,276
                
                
                $
                461,803
                
                
                $
                718,595Expenses
                
                
                128,688
                
                
                
                245,793
                
                
                
                392,645
                
                
                
                604,727Operating
      income
                
                
                26,937
                
                
                
                39,483
                
                
                
                69,158
                
                
                
                113,868Other
      income (expense)
                
                
                (8,971
                )
                
                
                4,564
                
                
                
                (29,471
                )
                
                
                (26,862
                )Net
      income
                
                $
                17,966
                
                
                $
                44,047
                
                
                $
                39,687
                
                
                $
                87,006Net
      income attributable to noncontrolling interests
                
                
                (7,794
                )
                
                
                (23,783
                )
                
                
                (14,327
                )
                
                
                (43,878
                )Net
      income attributable to Penn Virginia GP Holdings, L.P.
                
                $
                10,172
                
                
                $
                20,264
                
                
                $
                25,360
                
                
                $
                43,128




PVR
currently conducts operations in two business segments:  (i) coal and
natural resource management and (ii) natural gas midstream.




·
            PVR
      Coal and Natural Resource Management—leasing of coal properties in
      exchange for royalty payments and other land management
      activities.




·
            PVR
      Natural Gas Midstream—natural gas processing, gathering and other related
      services.




The
following table presents a summary of certain financial information relating to
PVR’s segments (in thousands):




PVR
                  Coal and Natural
                  Resource
                  Management
                
                
                PVR
                  Natural Gas
                  Midstream
                
                
                Corporate and
                  Other
                
                
                ConsolidatedFor
      the Nine Months Ended September 30, 2009:Revenues
                
                $
                108,575
                
                
                $
                353,228
                
                
                $
                -
                
                
                $
                461,803Cost
      of midstream gas purchased
                
                
                -
                
                
                
                285,129
                
                
                
                -
                
                
                
                285,129Operating costs and expenses
                
                
                18,486
                
                
                
                35,081
                
                
                
                1,978
                
                
                
                55,545Depreciation,
      depletion and amortization
                
                
                23,557
                
                
                
                28,414
                
                
                
                -
                
                
                
                51,971Operating income
      (loss)
                
                $
                66,532
                
                
                $
                4,604
                
                
                $
                (1,978
                )
                
                $
                69,158For
      the Nine Months Ended September 30, 2008:Revenues
                
                $
                111,010
                
                
                $
                607,585
                
                
                $
                -
                
                
                $
                718,595Cost
      of midstream gas purchased
                
                
                -
                
                
                
                513,778
                
                
                
                -
                
                
                
                513,778Operating costs and expenses
                
                
                20,417
                
                
                
                27,492
                
                
                
                1,718
                
                
                
                49,627Depreciation,
      depletion and amortization
                
                
                22,733
                
                
                
                18,589
                
                
                
                -
                
                
                
                41,322Operating income
      (loss)
                
                $
                67,860
                
                
                $
                47,726
                
                
                $
                (1,718
                )
                
                $
                113,868


15


Results
of Operations




PVR
Coal and Natural Resource Management Segment





As of
December 31, 2008, PVR owned or controlled approximately 827 million tons of
proven and probable coal reserves in Central and Northern Appalachia, the San
Juan Basin and the Illinois Basin.  PVR enters into long-term leases
with experienced, third-party mine operators, providing them the right to mine
PVR’s coal reserves in exchange for royalty payments.  PVR actively
works with its lessees to develop efficient methods to exploit its reserves and
to maximize production from its properties.  PVR does not operate any
mines.  In the nine months ended September 30, 2009, PVR’s lessees
produced 25.9 million tons of coal from PVR’s properties and paid to PVR coal
royalties revenues of $90.4 million, for an average royalty per ton of $3.50
($3.33 per ton net of coal royalties expenses).  Approximately 82% of
PVR’s coal royalties revenues in the nine months ended September 30, 2009 was
derived from coal mined on PVR’s properties under leases containing royalty
rates based on the higher of a fixed base price or a percentage of the gross
sales price.  The balance of PVR’s coal royalties revenues for the
respective periods was derived from coal mined on PVR’s properties under leases
containing fixed royalty rates that escalate annually.




PVR also
earns revenues from other land management activities, such as selling standing
timber, leasing fee-based coal-related infrastructure facilities to certain
lessees and end-user industrial plants, collecting oil and gas royalties and
from coal transportation, or wheelage, fees.




The
deterioration of the global economy, including financial and credit markets, has
reduced worldwide demand for coal with resultant price
declines.  Depending on the longevity and ultimate severity of the
deterioration, demand for coal may continue to decline, which could adversely
affect production and pricing for coal mined by PVR’s lessees, and,
consequently, adversely affect the royalty income received by PVR and PVR’s
ability to make cash distributions to its limited partners and to us, the owner
of PVR’s general partner.  The deterioration of the global economy has
also adversely affected credit availability and PVR’s access to new capital.
This limited access to capital and credit availability has and could continue to
hamper PVR’s ability to fund acquisitions, potentially restricting future growth
potential.





16




Three
and Nine Months Ended September 30, 2009 Compared with the


Three
and Nine Months Ended September 30, 2008





The
following table sets forth a summary of certain financial and other data for the
PVR coal and natural resource management segment for the three and nine months
ended September 30, 2009 and 2008 (in thousands, except as noted):




Three Months Ended September
      30,
                          
                          
                          Nine Months Ended September
    30,2009
                          
                          
                          2008
                          
                          
                          2009
                          
                          
                          2008Financial HighlightsRevenuesCoal
      royalties
                          
                          $
                          29,821
                          
                          
                          $
                          33,308
                          
                          
                          $
                          90,448
                          
                          
                          $
                          88,911Coal
      services
                          
                          
                          1,869
                          
                          
                          
                          1,815
                          
                          
                          
                          5,502
                          
                          
                          
                          5,518Timber
                          
                          
                          1,582
                          
                          
                          
                          1,911
                          
                          
                          
                          4,355
                          
                          
                          
                          5,328Oil
      and gas royalty
                          
                          
                          535
                          
                          
                          
                          1,940
                          
                          
                          
                          1,783
                          
                          
                          
                          4,730Other
                          
                          
                          1,372
                          
                          
                          
                          2,686
                          
                          
                          
                          6,487
                          
                          
                          
                          6,523Total
      revenues
                          
                          
                          35,179
                          
                          
                          
                          41,660
                          
                          
                          
                          108,575
                          
                          
                          
                          111,010ExpensesCoal
      royalties
                          
                          
                          1,587
                          
                          
                          
                          2,125
                          
                          
                          
                          4,380
                          
                          
                          
                          8,034Other
      operating
                          
                          
                          559
                          
                          
                          
                          752
                          
                          
                          
                          2,200
                          
                          
                          
                          1,488Taxes
      other than income
                          
                          
                          421
                          
                          
                          
                          373
                          
                          
                          
                          1,146
                          
                          
                          
                          1,115General
      and administrative
                          
                          
                          3,388
                          
                          
                          
                          3,321
                          
                          
                          
                          10,760
                          
                          
                          
                          9,780Depreciation,
      depletion and amortization
                          
                          
                          7,999
                          
                          
                          
                          8,794
                          
                          
                          
                          23,557
                          
                          
                          
                          22,733Total
      expenses
                          
                          
                          13,954
                          
                          
                          
                          15,365
                          
                          
                          
                          42,043
                          
                          
                          
                          43,150Operating
      income
                          
                          $
                          21,225
                          
                          
                          $
                          26,295
                          
                          
                          $
                          66,532
                          
                          
                          $
                          67,860Operating StatisticsRoyalty
      coal tons produced by lessees (tons in thousands)
                          
                          
                          8,387
                          
                          
                          
                          8,496
                          
                          
                          
                          25,874
                          
                          
                          
                          24,975Coal
      royalties revenues, net of coal royalties expenses
                          
                          $
                          28,234
                          
                          
                          $
                          31,183
                          
                          
                          $
                          86,068
                          
                          
                          $
                          80,877Average
      coal royalties revenues per ton ($/ton)
                          
                          $
                          3.56
                          
                          
                          $
                          3.92
                          
                          
                          $
                          3.50
                          
                          
                          $
                          3.56Less
      coal royalties expenses per ton ($/ton)
                          
                          
                          (0.19
                          )
                          
                          
                          (0.25
                          )
                          
                          
                          (0.17
                          )
                          
                          
                          (0.32
                          )Average
      net coal royalties per ton ($/ton)
                          
                          $
                          3.37
                          
                          
                          $
                          3.67
                          
                          
                          $
                          3.33
                          
                          
                          $
                          3.24




The
following tables summarize coal production, coal royalties revenues and coal
royalties per ton by region for the three and nine months ended September 30,
2009 and 2008:




Coal
      Production
                
                
                Coal
      Royalties Revenues
                
                
                Coal
      Royalties Per TonThree
      Months Ended September 30,
                
                
                Three
      Months Ended September 30,
                
                
                Three
      Months Ended September 30,Region
                
                2009
                
                
                2008
                
                
                2009
                
                
                2008
                
                
                2009
                
                
                2008(tons
      in thousands)
                
                
                (in
      thousands)
                
                
                ($/ton)Central
      Appalachia
                
                
                4,594
                
                
                
                4,815
                
                
                $
                21,089
                
                
                $
                25,184
                
                
                $
                4.59
                
                
                $
                5.23Northern
      Appalachia
                
                
                563
                
                
                
                983
                
                
                
                1,065
                
                
                
                1,931
                
                
                
                1.89
                
                
                
                1.96Illinois
      Basin
                
                
                1,333
                
                
                
                1,110
                
                
                
                3,644
                
                
                
                2,923
                
                
                
                2.73
                
                
                
                2.63San
      Juan Basin
                
                
                1,897
                
                
                
                1,588
                
                
                
                4,023
                
                
                
                3,270
                
                
                
                2.12
                
                
                
                2.06Total
                
                
                8,387
                
                
                
                8,496
                
                
                $
                29,821
                
                
                $
                33,308
                
                
                $
                3.56
                
                
                $
                3.92Less
      coal royalties expenses  (1)
                
                
                
                
                
                
                
                
                
                
                (1,587
                )
                
                
                (2,125
                )
                
                
                (0.19
                )
                
                
                (0.25
                )Net
      coal royalties revenues
                
                
                
                
                
                
                
                
                
                $
                28,234
                
                
                $
                31,183
                
                
                $
                3.37
                
                
                $
                3.67





Coal
      Production
                
                
                Coal Royalties
      Revenues
                
                
                Coal Royalties Per
      TonNine Months Ended September
      30,
                
                
                Nine Months Ended September
      30,
                
                
                Nine Months Ended September
      30,Region
                
                2009
                
                
                2008
                
                
                2009
                
                
                2008
                
                
                2009
                
                
                2008(tons
      in thousands)
                
                
                (in
      thousands)
                
                
                ($/ton)Central
      Appalachia
                
                
                13,902
                
                
                
                14,770
                
                
                $
                63,964
                
                
                $
                68,213
                
                
                $
                4.60
                
                
                $
                4.62Northern
      Appalachia
                
                
                2,680
                
                
                
                2,767
                
                
                
                4,965
                
                
                
                4,922
                
                
                
                1.85
                
                
                
                1.78Illinois
      Basin
                
                
                3,739
                
                
                
                3,262
                
                
                
                9,747
                
                
                
                7,173
                
                
                
                2.61
                
                
                
                2.20San
      Juan Basin
                
                
                5,553
                
                
                
                4,176
                
                
                
                11,772
                
                
                
                8,603
                
                
                
                2.12
                
                
                
                2.06Total
                
                
                25,874
                
                
                
                24,975
                
                
                $
                90,448
                
                
                $
                88,911
                
                
                $
                3.50
                
                
                $
                3.56Less
      coal royalties expenses  (1)
                
                
                
                
                
                
                
                
                
                
                (4,380
                )
                
                
                (8,034
                )
                
                
                (0.17
                )
                
                
                (0.32
                )Net
      coal royalties revenues
                
                
                
                
                
                
                
                
                
                $
                86,068
                
                
                $
                80,877
                
                
                $
                3.33
                
                
                $
                3.24





(1)  PVR’s
coal royalties expenses are incurred primarily in the Central Appalachian
region.




17





Production.  Coal
production decreased by 0.1 million tons, or 1%, from 8.5 million tons in the
three months ended September 30, 2008 to 8.4 million tons in the same period of
2009.  This decrease was primarily driven by decreased longwall production
in the Northern Appalachian region resulting from adverse geological conditions
hampering production and recovery.  Additionally, there were decreases in
the Central Appalachia region primarily attributable to production cutbacks due
to a depressed coal market.  2009 production in the Central
Appalachian region also decreased due to cutbacks in longwall mining operations
that were prevalent during 2008.  Production from one of PVR’s lessees
ceased in the third quarter of 2008 as its operations moved onto adjacent
reserves.  These production decreases were partially offset by
production increases in both the Illinois and San Juan Basins.  The
Illinois Basin production increased primarily due to the recognition of
royalties and tonnages for previously mined reserves held in escrow pending
property ownership research.  The San Juan Basin benefited from the start
up of a second mine and improved mining conditions in the region.




Coal
production increased by 0.9 million tons, or 4%, from 25.0 million tons in the
nine months ended September 30, 2008 to 25.9 million tons in the same period of
2009.  The year to date increase in production primarily resulted from the
start up of a second mine and improved mining conditions in the San Juan Basin,
as well as the third quarter 2009 royalty and tonnage adjustment in the Illinois
Basin for previously mined reserves temporarily held in escrow as ownership
research was conducted.  Partially offsetting these increases was the
decline of 2009 production in the Central Appalachian region primarily in
response to a depressed coal market, most notably in the metallurgical market
where coal demand has fallen drastically since the third quarter of
2008.  Also contributing to the production decrease in the Central
Appalachia region was the reduction in longwall mining activity compared to the
same period in 2008.





Revenues.  Net coal
royalties revenues decreased by $3.0 million, or 10%, from $31.2 million in the
three months ended September 30, 2008 to $28.2 million in the same period of
2009.  This decrease was primarily attributable to lower coal sales
prices in Central Appalachia which in turn resulted in lower royalty revenues,
and, to a lesser extent, to lower coal volumes sold from PVR’s
properties.  The average net coal royalty per ton, which represents
the average coal royalties revenues per ton net of coal royalties expenses per
ton, decreased by $0.30 per ton, or 8%, from $3.67 per ton in the three months
ended September 30, 2008 to $3.37 per ton in the same period of
2009.  This decrease was attributable to a $0.36 per ton decrease in
average coal royalties revenues per ton, partially offset by a $0.06 per ton
decrease in coal royalties expenses.  Average coal royalties revenues
per ton decreased the most in the Central Appalachian region primarily due to
significantly reduced demand for metallurgical coal in the international coal
markets.




Coal
services revenues remained relatively constant from the three months ended
September 30, 2008 to the same period of 2009.  Timber revenues
decreased by $0.3 million, or 16%, from $1.9 million in the three months ended
September 30, 2008 to $1.6 million in the same period of 2009 primarily due to
lower sales prices resulting from weakened market conditions for furniture-grade
wood products.  Oil and gas royalties revenues decreased by $1.4
million, or 74%, from $1.9 million in the three months ended September 30, 2008
to $0.5 million in the same period of 2009 primarily due to lower natural gas
prices.  Other revenues, which consisted primarily of wheelage fees,
forfeiture income and management fees, decreased by $1.3 million, or 48%, from
$2.7 million in the three months ended September 30, 2008 to $1.4 million in the
same period of 2009 primarily due to lower wheelage income.




Net coal
royalties revenues increased by $5.2 million, or 6%, from $80.9 million in the
nine months ended September 30, 2008 to $86.1 million in the same period of
2009.  This increase was attributable to increases in both production
and average net coal sales prices received by PVR’s lessees.  The
average net coal royalty per ton increased by $0.09 per ton, or 3%, from $3.24
per ton in the nine months ended September 30, 2008 to $3.33 per ton in the same
period of 2009.  This increase was attributable to both an increase in
the average coal royalties revenues per ton for most regions, especially in the
Illinois Basin, where new contract pricing has generated higher gross sales
prices for tonnages in that region, and lower coal royalties expenses caused by
lower production from certain subleased properties.


18




Coal
services revenues remained relatively constant from the nine months ended
September 30, 2008 to the same period of 2009.  Timber revenues
decreased by $0.9 million, or 17%, from $5.3 million in the nine months ended
September 30, 2008 to $4.4 million in the same period of 2009 primarily due to
lower sales prices resulting from weakened market conditions for furniture-grade
wood products.  Oil and gas royalties revenues decreased by $2.9
million, or 62%, from $4.7 million in the nine months ended September 30, 2008
to $1.8 million in the same period of 2009 primarily due to lower natural gas
prices.  Other revenues remained relatively constant from the nine
months ended September 30, 2008 to the same period of 2009.




Expenses.  Other
operating expenses decreased by $0.2 million, or 25%, from $0.8 million in the
three months ended September 30, 2008 to $0.6 million in the same period of 2009
primarily due to lower expenses related to core drilling and mine maintenance
costs for which PVR is contractually obligated.  Taxes other than
income and general and administrative expenses remained relatively constant from
the three months ended September 30, 2008 to the same period of
2009.  Depreciation, depletion and amortization expenses decreased by
$0.8 million, or 9%, from $8.8 million in the three months ended September 30,
2008 to $8.0 million in the same period of 2009 primarily due to lower depletion
expenses for PVR’s mining and timber operations.




Other
operating expenses increased by $0.7 million, or 47%, from $1.5 million in the
nine months ended September 30, 2008 to $2.2 million in the same period of 2009
primarily due to higher expenses related to PVR’s timber operations and costs
incurred under PVR’s contractual obligations for mine
maintenance.  Taxes other than income remained relatively constant
from the nine months ended September 30, 2008 to the same period of
2009.  General and administrative costs increased by $1.0 million, or
10%, from $9.8 million in the nine months ended September 30, 2008 to $10.8
million in the same period of 2009 primarily due to higher staffing and related
employee benefit costs.  Depreciation, depletion and amortization
expenses increased by $0.9 million, or 4%, from $22.7 million in the nine months
ended September 30, 2008 to $23.6 million in the same period of 2009 primarily
due to higher depletion expenses for PVR’s mining and timber
operations.




PVR
Natural Gas Midstream Segment





The PVR
natural gas midstream segment provides natural gas processing, gathering and
other related services. As of September 30, 2009, PVR owned and operated natural
gas midstream assets located in Oklahoma and Texas, including six natural gas
processing facilities having 400 million cubic feet per day (MMcfd) of total
capacity and approximately 4,069 miles of natural gas gathering
pipelines.  The PVR natural gas midstream business earns revenues
primarily from gas processing contracts with natural gas producers and from fees
charged for gathering natural gas volumes and providing other related
services.  In addition, PVR owns a 25% member interest in Thunder
Creek Gas Services, LLC, or Thunder Creek, a joint venture that gathers and
transports coalbed methane in Wyoming’s Powder River Basin.  PVR also
owns a natural gas marketing business, which aggregates third-party volumes and
sells those volumes into intrastate pipeline systems and at market hubs accessed
by various interstate pipelines.




During
the three months ended September 30, 2009, PVR completed a 40 MMcfd plant
expansion in its Beaver/Spearman complex, or the Panhandle System, in Texas and
Oklahoma in July and acquired an additional 60 MMcfd plant in Oklahoma that
began accepting gas on September 1, 2009. This additional processing capacity
allows PVR to process all of its Panhandle natural gas through PVR’s own
facilities and eliminate fees paid to third parties for processing services.
 PVR also acquired a 50% member interest in a residue pipeline connected to
its east Texas processing plant.




For the
nine months ended September 30, 2009, system throughput volumes at PVR’s gas
processing plants and gathering systems, including gathering-only volumes, were
93.4 billion cubic feet (Bcf), or approximately 342 MMcfd.  For the
nine months ended September 30, 2009, 23% and 14% of the PVR natural gas
midstream segment’s revenues and 18% and 11% of our total consolidated revenues
were derived from two of the PVR natural gas midstream segment’s customers,
Conoco, Inc. and Tenaska Marketing Ventures.




PVR
continually seeks new supplies of natural gas to offset the natural declines in
production from the wells currently connected to its systems and to increase
system throughput volumes.  New natural gas supplies are obtained for
all of PVR’s systems by contracting for production from new wells, connecting
new wells drilled on dedicated acreage and contracting for natural gas that has
been released from competitors’ systems.  In the nine months ended
September 30, 2009, the PVR natural gas midstream segment made aggregate capital
expenditures of $72.0 million, primarily related to PVR’s Panhandle System in
Texas and Oklahoma.




19




Revenues,
profitability and the future rate of growth of the PVR natural gas midstream
segment are highly dependent on market demand and prevailing natural gas liquid,
or NGL, and natural gas prices.  NGL and natural gas prices have been
subject to significant volatility in recent years in response to changes in the
supply and demand for NGL products and natural gas market demand.  The
deterioration of the global economy has resulted in a decrease in
demand for natural gas and NGLs.  Depending on the longevity and
ultimate severity of the deterioration, NGL production from its processing
plants could decrease and adversely affect PVR’s natural gas midstream
processing income and PVR’s ability to make cash distributions.  The
deterioration of the global economy has also adversely affected credit
availability and PVR’s access to new capital.  This limited access to
capital and credit availability has and could continue to hamper PVR’s ability
to fund acquisitions, potentially restricting future growth
potential.




Three
and Nine Months Ended September 30, 2009 Compared with the


Three
and Nine Months Ended September 30, 2008




The
following table sets forth a summary of certain financial and other data for the
PVR natural gas midstream segment for the three and nine months ended September
30, 2009 and 2008 (in thousands, except as noted):




Three Months Ended September
      30,
                    
                    
                    Nine Months Ended September
    30,2009
                    
                    
                    2008
                    
                    
                    2009
                    
                    
                    2008Financial HighlightsRevenuesResidue
      gas
                    
                    $
                    62,801
                    
                    
                    $
                    158,709
                    
                    
                    $
                    211,165
                    
                    
                    $
                    373,913Natural
      gas liquids
                    
                    
                    48,147
                    
                    
                    
                    72,349
                    
                    
                    
                    117,670
                    
                    
                    
                    199,053Condensate
                    
                    
                    4,659
                    
                    
                    
                    7,202
                    
                    
                    
                    11,507
                    
                    
                    
                    21,870Gathering,
      processing and transportation fees
                    
                    
                    2,836
                    
                    
                    
                    3,022
                    
                    
                    
                    8,540
                    
                    
                    
                    6,291Total
      natural gas midstream revenues (1)
                    
                    
                    118,443
                    
                    
                    
                    241,282
                    
                    
                    
                    348,882
                    
                    
                    
                    601,127Equity
      earnings in equity investment
                    
                    
                    1,597
                    
                    
                    
                    981
                    
                    
                    
                    3,345
                    
                    
                    
                    1,537Producer
      services
                    
                    
                    406
                    
                    
                    
                    1,353
                    
                    
                    
                    1,001
                    
                    
                    
                    4,921Total
      revenues
                    
                    
                    120,446
                    
                    
                    
                    243,616
                    
                    
                    
                    353,228
                    
                    
                    
                    607,585ExpensesCost
      of midstream gas purchased (1)
                    
                    
                    92,355
                    
                    
                    
                    211,262
                    
                    
                    
                    285,129
                    
                    
                    
                    513,778Operating
                    
                    
                    6,884
                    
                    
                    
                    6,164
                    
                    
                    
                    20,358
                    
                    
                    
                    15,031Taxes
      other than income
                    
                    
                    584
                    
                    
                    
                    596
                    
                    
                    
                    2,062
                    
                    
                    
                    1,902General
      and administrative
                    
                    
                    4,180
                    
                    
                    
                    3,757
                    
                    
                    
                    12,661
                    
                    
                    
                    10,559Depreciation
      and amortization
                    
                    
                    9,852
                    
                    
                    
                    8,109
                    
                    
                    
                    28,414
                    
                    
                    
                    18,589Total
      operating expenses
                    
                    
                    113,855
                    
                    
                    
                    229,888
                    
                    
                    
                    348,624
                    
                    
                    
                    559,859Operating
      income
                    
                    $
                    6,591
                    
                    
                    $
                    13,728
                    
                    
                    $
                    4,604
                    
                    
                    $
                    47,726Operating StatisticsSystem
      throughput volumes (MMcf)
                    
                    
                    29,811
                    
                    
                    
                    27,744
                    
                    
                    
                    93,433
                    
                    
                    
                    68,915Daily
      throughput volumes (MMcfd)
                    
                    
                    324
                    
                    
                    
                    302
                    
                    
                    
                    342
                    
                    
                    
                    252Gross
      margin
                    
                    $
                    26,088
                    
                    
                    $
                    30,020
                    
                    
                    $
                    63,753
                    
                    
                    $
                    87,349Cash
      impact of derivatives
                    
                    
                    1,993
                    
                    
                    
                    (12,551
                    )
                    
                    
                    9,162
                    
                    
                    
                    (29,151
                    )Gross
      margin, adjusted for impact of derivatives
                    
                    $
                    28,081
                    
                    
                    $
                    17,469
                    
                    
                    $
                    72,915
                    
                    
                    $
                    58,198Gross
      margin ($/Mcf)
                    
                    $
                    0.88
                    
                    
                    $
                    1.08
                    
                    
                    $
                    0.68
                    
                    
                    $
                    1.27Cash
      impact of derivatives ($/Mcf)
                    
                    
                    0.06
                    
                    
                    
                    (0.45
                    )
                    
                    
                    0.10
                    
                    
                    
                    (0.42
                    )Gross
      margin, adjusted for impact of derivatives ($/Mcf)
                    
                    $
                    0.94
                    
                    
                    $
                    0.63
                    
                    
                    $
                    0.78
                    
                    
                    $
                    0.85





(1)
            In
      the three months ended September 30, 2009, PVR recorded $15.1 million of
      natural gas midstream revenues and $15.1 million for the cost of midstream
      gas purchased related to the purchase of natural gas from Penn Virginia
      Oil & Gas, L.P., or PVOG LP, and the subsequent sale of that gas to
      third parties.  In the nine months ended September 30, 2009, PVR
      recorded $56.4 million of natural gas midstream revenues and $56.4 million
      for the cost of midstream gas purchased related to the purchase of natural
      gas from PVOG LP and the subsequent sale of that gas to third
      parties.  PVR takes title to the gas prior to transporting it to
      third parties.




20





Gross
Margin.  PVR’s gross margin is the difference between PVR’s
natural gas midstream revenues and PVR’s cost of midstream gas
purchased.  Natural gas midstream revenues include residue gas sold
from processing plants after NGLs are removed, NGLs sold after being removed
from system throughput volumes received, condensate collected and sold and
gathering and other fees primarily from natural gas volumes connected to PVR’s
gas processing plants.  Cost of midstream gas purchased consists of
amounts payable to third-party producers for natural gas purchased under
percentage-of-proceeds and gas purchase/keep-whole contracts.




The 13%
gross margin decrease in the three months ended September 30, 2009 as compared
to the same period of 2008 was primarily due to lower commodity pricing and frac
spreads.  Frac spreads are the difference between the price of NGLs
sold and the cost of natural gas purchased on a per million British thermal
unit (MMBtu) basis.  The gross margin decrease was partially
offset by margins earned from higher system throughput volumes.




System
throughput volumes increased by 22 MMcfd, or 7%, from 302 MMcfd in the three
months ended September 30, 2008 to 324 MMcfd in the same period of 2009
primarily due to the continued successful development by producers operating in
the vicinity of the Panhandle System, as well as PVR’s success in contracting
and connecting new supply.




During
the three months ended September 30, 2009, PVR generated a majority of its gross
margin from contractual arrangements under which the gross margin is exposed to
increases and decreases in the price of natural gas and NGLs.  As part
of its risk management strategy, PVR uses derivative financial instruments to
economically hedge NGLs sold and natural gas purchased.  See Note 4,
“Derivative Instruments,” in the Notes to Condensed Consolidated Financial
Statements in Item 1, “Financial Statements,” for a description of PVR’s
derivatives program.  Adjusted for the cash impact of PVR’s commodity
derivative instruments, PVR’s gross margin increased by $10.6 million, or 61%,
from $17.5 million in the three months ended September 30, 2008 to $28.1 million
in the same period of 2009.  On a per thousand cubic feet (Mcf )
basis, adjusted for the cash impact of PVR’s commodity derivatives, PVR’s gross
margin increased by $0.31 per Mcf, or 49%, from $0.63 per Mcf in the three
months ended September 30, 2008 to $0.94 per Mcf in the same period of
2009.  This increase was primarily attributable to changes in
commodity prices and the mix of PVR’s commodity derivatives.




The 27%
gross margin decrease in the nine months ended September 30, 2009 as compared to
the same period of 2008 was a result of lower commodity pricing and frac
spreads, partially offset by margins earned from higher system throughput
volumes.




System
throughput volumes increased by 90 MMcfd, or 36%, from 252 MMcfd in the nine
months ended September 30, 2008 to 342 MMcfd in the same period of 2009
primarily due to the continued successful development by producers operating in
the vicinity of the Panhandle System, as well as PVR’s success in contracting
and connecting new supply.  The Crossroads plant in East Texas, which
became fully operational in April 2008, and the acquisition of PVR’s North Texas
gathering system, which was consummated in the third quarter of 2008, also
contributed to the volume increase.




Adjusted
for the cash impact of PVR’s commodity derivative instruments, PVR’s gross
margin increased by $14.7 million, or 25%, from $58.2 million in the nine months
ended September 30, 2008 to $72.9 million in the same period of
2009.  On a per Mcf basis, adjusted for the cash impact of PVR’s
commodity derivatives, PVR’s gross margin decreased by $0.07 per Mcf, or 8%,
from $0.85 per Mcf in the nine months ended September 30, 2008 to $0.78 per Mcf
in the same period of 2009.  This decrease was primarily attributable
to the addition of lower margin fixed fee volumes at the Crossroads plant and
from PVR’s recently acquired North Texas gathering system.




Equity Earnings in Equity
Investment.  PVR’s equity earnings increased in both the three
and nine months ended September 30, 2009 as compared to the same periods of 2008
primarily as a result of revenues generated from PVR’s 25% member interest in
the Thunder Creek joint venture that gathers and transports coalbed methane in
Wyoming’s Powder River Basin.  In 2009, revenues from this joint
venture have grown primarily due to mainline volume increases despite the
reduction in drilling in the Powder River Basin.




Producer Services
Revenues.  Producer services revenues decreased by $1.0
million, or 71%, from $1.4 million  in the three months ended
September 30, 2008 to $0.4 million in the same period of 2009 primarily due to a
negative relative change in the natural gas indices on which PVR’s purchases and
sales of natural gas are based and a decrease in marketing fees resulting from
lower commodity prices.




21





Producer
services revenues decreased by $3.9 million, or 80%, from $4.9 million in the
nine months ended September 30, 2008 to $1.0 million in the same period of 2009
primarily due to a negative relative change in the natural gas indices on which
PVR’s purchases and sales of natural gas are based and a decrease in marketing
fees resulting from lower commodity prices.





Expenses.Operating
expenses increased by $0.7 million, or 11%, from $6.2 million in the three
months ended September 30, 2008 to $6.9 million in the same period of 2009
primarily due to higher costs for compressor rentals related to PVR’s expanding
footprint in the Texas and Oklahoma panhandle.  General and
administrative expenses increased by $0.4 million, or 11%, from $3.8 million in
the three months ended September 30, 2008 to $4.2 million in the same period of
2009 primarily due to higher staffing and related employee benefit
costs.  Depreciation and amortization expenses increased by $1.8
million, or 22%, from $8.1 million in the three months ended September 30,
2008 to $9.9 million in the same period of 2009 primarily due to capital
spending on expansion projects, such as the Spearman and Crossroads plants, and
PVR’s recent acquisitions.




Operating
expenses increased by $5.4 million, or 36%, from $15.0 million in the nine
months ended September 30, 2008 to $20.4 million in the same period of 2009
primarily due to higher costs for compressor rentals, employee costs and general
supplies needed to operate assets in the Texas and Oklahoma
panhandle.  General and administrative expenses increased by $2.1
million, or 20%, from $10.6 million in the nine months ended September 30, 2008
to $12.7 million in the same period of 2009 primarily due to higher staffing and
related employee benefit costs.  Depreciation and amortization
expenses increased by $9.8 million, or 53%, from $18.6 million in the nine
months ended September 30, 2008 to $28.4 million in the same period of 2009
primarily due to capital spending on expansion projects, such as the Spearman
and Crossroads plants, and PVR’s recent acquisitions.




Other





Our other
results consist of interest expense and derivative gains and
losses.  The following table sets forth a summary of certain financial
data for our other results for the three and nine months ended September 30,
2009 and 2008 (in thousands):





Three Months Ended September
      30,
                
                
                Nine Months Ended September
    30,2009
                
                
                2008
                
                
                2009
                
                
                2008Operating
      income
                
                $
                26,937
                
                
                $
                39,483
                
                
                $
                69,158
                
                
                $
                113,868Other
      income (expense)Interest
      expense
                
                
                (6,505
                )
                
                
                (7,060
                )
                
                
                (18,486
                )
                
                
                (17,366
                )Other
                
                
                344
                
                
                
                (4,118
                )
                
                
                1,020
                
                
                
                (3,072
                )Derivatives
                
                
                (2,810
                )
                
                
                15,742
                
                
                
                (12,005
                )
                
                
                (6,424
                )Net
      income
                
                $
                17,966
                
                
                $
                44,047
                
                
                $
                39,687
                
                
                $
                87,006




Interest
Expense.  Interest expense for the three and nine months ended
September 30, 2009 and 2008 is comprised of the following (in
thousands):




Three Months Ended September
      30,
                
                
                Nine Months Ended September
    30,Source
                
                2009
                
                
                2008
                
                
                2009
                
                
                2008Interest
      on borrowings
                
                $
                5,648
                
                
                $
                6,206
                
                
                $
                16,112
                
                
                $
                16,828Capitalized
      interest
                
                
                -
                
                
                
                -
                
                
                
                (226
                )
                
                
                (675
                )Interest
      rate swaps
                
                
                857
                
                
                
                854
                
                
                
                2,600
                
                
                
                1,213Total
      interest expense
                
                $
                6,505
                
                
                $
                7,060
                
                
                $
                18,486
                
                
                $
                17,366





22




Interest
expense incurred on borrowings under PVR’s revolving credit facility, or the PVR
Revolver, for both the three and nine months ended September 30, 2009 decreased
from the comparative periods in 2008 due to lower interest
rates.  This decrease was partially offset by the effects of an
increase in PVR’s weighted average borrowings due to PVR’s capital spending
program and an increase in non-cash interest expense related to debt issuance
costs incurred in March 2009.  PVR’s interest rate swaps, or the PVR
Interest Rate Swaps, which establish fixed interest rates on a portion of the
outstanding borrowings under the PVR Revolver, have also increased the total
interest expense.




Derivatives.  Our
results of operations and operating cash flows were impacted by changes in
market prices affecting fair values for NGL, crude oil and natural gas
prices.  Commodity markets are volatile, and as a result, PVR’s
hedging activity results can vary significantly.  PVR determines the
fair values of its commodity derivative instruments using quoted forward prices
for the respective commodities and discount rates adjusted for the credit risk
of PVR’s counterparties for derivatives in an asset position and PVR’s own
credit risk for derivatives in a liability position.




PVR’s
derivative activity for the three and nine months ended September 30, 2009 and
2008 is summarized below (in thousands):




Three Months Ended September
      30,
                
                
                Nine Months Ended September
    30,2009
                
                
                2008
                
                
                2009
                
                
                2008PVR
      Interest Rate Swap unrealized derivative gain (loss)
                
                $
                (1,640
                )
                
                $
                -
                
                
                $
                1,776
                
                
                $
                -PVR
      Interest Rate Swap realized derivative loss
                
                
                (2,307
                )
                
                
                -
                
                
                
                (5,027
                )
                
                
                -Natural
      gas midstream commodity unrealized derivative gain (loss)
                
                
                (856
                )
                
                
                29,796
                
                
                
                (17,916
                )
                
                
                26,855Natural
      gas midstream commodity realized derivative gain (loss)
                
                
                1,993
                
                
                
                (14,054
                )
                
                
                9,162
                
                
                
                (33,279
                )Total
      derivative gain (loss)
                
                $
                (2,810
                )
                
                $
                15,742
                
                
                $
                (12,005
                )
                
                $
                (6,424
                )





Noncontrolling
Interests.  Noncontrolling interests represent net income
allocated to the limited partner units of PVR owned by the
public.  See Note 6, “Noncontrolling Interests,” in the Notes to
Condensed Consolidated Financial Statements in Item 1, “Financial Statements,”
for a description of the noncontrolling interests in PVR.  In the
three months ended September 30, 2009 and 2008, the noncontrolling interests in
PVR reduced our consolidated net income by $7.8 million and $23.8
million.  The decrease in the noncontrolling interests in PVR was
primarily due to the decrease in PVR’s net income, from $44.6 million in the
three months ended September 30, 2008 to $18.8 million in the same period of
2009.  In the nine months ended September 30, 2009 and 2008, the
noncontrolling interests in PVR reduced our consolidated net income by $14.3
million and $43.9 million.  The decrease in the noncontrolling
interests in PVR was primarily due to the decrease in PVR’s net income, from
$88.6 million in the nine months ended September 30, 2008 to $41.6 million in
the same period of 2009.




Liquidity
and Capital Resources




We rely
exclusively on distributions from PVR to fund any cash requirements for our
operations.




On an
ongoing basis, PVR generally satisfies its working capital requirements and
funds its capital expenditures using cash generated from its operations,
borrowings under the $800.0 million PVR Revolver and proceeds from PVR equity
offerings.  As discussed in more detail in “—Long-Term Debt” below, as
of September 30, 2009, PVR had availability of $170.3 million on the PVR
Revolver.  PVR funds its debt service obligations and distributions to
unitholders solely using cash generated from its operations. PVR believes that
the cash generated from its operations and its borrowing capacity will be
sufficient to meet its working capital requirements, anticipated capital
expenditures (other than major capital improvements or acquisitions), interest
payments on amounts outstanding under the PVR Revolver and its distribution
payments for the remainder of 2009.  However, PVR’s ability to meet
these requirements in the future will depend upon PVR’s future operating
performance, which will be affected by prevailing economic conditions in the
coal industry and natural gas midstream market, some of which are beyond PVR’s
control.




23




Cash
Flows




The
following table summarizes our cash flow statements for the nine months ended
September 30, 2009 and 2008 (in thousands):




Nine Months Ended September
    30,2009
                
                
                2008Cash
      flows from operating activities:Net
      income contribution
                
                $
                39,687
                
                
                $
                87,006Adjustments
      to reconcile net income to net cash provided operating activities
      (summarized)
                
                
                71,603
                
                
                
                17,386Net
      changes in operating assets and liabilities
                
                
                3,540
                
                
                
                (11,277
                )Net
      cash provided by operating activities
                
                
                114,830
                
                
                
                93,115Net
      cash used in investing activities
                
                
                (72,419
                )
                
                
                (306,276
                )Net
      cash provided by (used in) financing activities
                
                
                (39,555
                )
                
                
                201,665Net
      increase (decrease) in cash and cash equivalents
                
                $
                2,856
                
                
                $
                (11,496
                )




Operating
Activities.  At September 30, 2009, we had $21.2 million in
cash and cash equivalents compared to $18.3 million at December 31,
2008.  Cash provided by operating activities for the nine months ended
September 30, 2009 was $114.8 million compared to $93.1 million for the
nine months ended September 30, 2008.  This increase was due primarily
to a significant change in cash settlements from derivatives, with net receipts
of $4.1 million for the nine months ended September 30, 2009 compared with net
payments of $33.3 million for the same period of 2008, partially offset by lower
gross margin from the PVR midstream segment in the nine month period of
2009.





Investing
Activities.  Cash used in investing activities was $72.4
million for the nine months ended September 30, 2009 compared to $306.3
million for the nine months ended September 30, 2008.  This decrease
was due to lower acquisition activity during the nine months ended
September 30, 2009 compared to the same period of 2008.




Financing
Activities.  Cash used in financing activities was $39.6
million for the nine months ended September 30, 2009 compared to cash
provided of $201.7 million for the nine months ended September 30,
2008.  During the nine months ended September 30, 2008, a PVR equity
issuance provided net proceeds of $141.0 million and was used in part to repay
borrowings under the PVR Revolver.  The proceeds from PVR’s borrowings
during both periods were used to fund PVR’s capital expenditures.





Long-Term
Debt




As of
September 30, 2009, we had no outstanding debt other than the debt of PVR
discussed below, which is included in our condensed consolidated financial
statements.  PVR’s debt is non-recourse to us.




In March
2009, PVR increased the size of the PVR Revolver from $700.0 million to $800.0
million, which resulted in $9.3 million of debt issuance costs.  The
PVR Revolver is secured with substantially all of PVR’s assets.  As of
September 30, 2009, PVR had remaining borrowing capacity of $170.3 million on
the PVR Revolver, net of outstanding borrowings of $628.1 million and letters of
credit of $1.6 million.  The PVR Revolver matures in December 2011 and
is available to PVR for general purposes, including working capital, capital
expenditures and acquisitions, and includes a $10.0 million sublimit for the
issuance of letters of credit.  Interest is payable at a base rate
plus an applicable margin of up to 1.25% if PVR selects the base rate borrowing
option or at a rate derived from the London Interbank Offered Rate, or LIBOR,
plus an applicable margin ranging from 1.75% to 2.75% if PVR selects the
LIBOR-based borrowing option.  At September 30, 2009, the base rate
applicable margin was 0.75% and the LIBOR-based rate applicable margin was
2.25%.  At September 30, 2009, the weighted average interest rate on
borrowings outstanding under the PVR Revolver was approximately
2.5%. PVR entered into the PVR Interest Rate Swaps to establish fixed
interest rates on a portion of the outstanding borrowings under the PVR
Revolver.  See Item 3, “Quantitative and Qualitative Disclosures About
Market Risk—Interest Rate Risk,” for a discussion of the PVR Interest Rate
Swaps.  As of September 30, 2009, PVR was in compliance with all of
its covenants under the PVR Revolver.




24




Future
Capital Needs and Commitments




Currently,
we have no capital requirements.  In the future, we may decide to
facilitate PVR acquisitions and other capital expenditures by the issuance of
debt or equity.




PVR
believes that short-term cash requirements for operating expenses and quarterly
distributions to us, the owner of its general partner, and its unitholders will
be funded through operating cash flows.  PVR believes that its
remaining borrowing capacity will be sufficient for its capital needs and
commitments for the remainder of 2009.  Subject to commodity prices
and the availability of capital, PVR is committed to the growth of both of its
business segments through a combination of organic projects and acquisitions of
new properties and assets.  For the remainder of 2009, PVR anticipates
making capital expenditures of approximately $11.0 to $19.0
million.  The majority of PVR’s 2009 capital expenditures are expected
to be incurred in the PVR natural gas midstream segment.





Long-term
cash requirements for PVR’s acquisitions and other capital expenditures are
expected to be funded by several sources, including cash flows from PVR’s
operating activities, borrowings under the PVR Revolver and the issuance of
additional PVR debt and equity securities if available on commercially
acceptable terms.  However, disruptions in the global financial and
commodities markets and the general economic climate have made access to equity
and debt capital markets very difficult since late in 2008.  While
signs of improvement in these markets have occurred, if PVR is unable to access
the capital markets for an extended period, PVR’s ability to make acquisitions
and other capital expenditures, as well as PVR’s ability to increase or sustain
cash distributions to its limited partners and to us, the owner of PVR’s general
partner, will likely become impaired.  If additional financing is
required, there are no assurances that it will be available or, if available,
that it can be obtained on terms favorable to PVR.




Environmental
Matters




PVR’s
operations and those of its coal lessees are subject to environmental laws and
regulations adopted by various governmental authorities in the jurisdictions in
which these operations are conducted.  The terms of PVR’s coal
property leases impose liability on the relevant lessees for all environmental
and reclamation liabilities arising under those laws and
regulations.  The lessees are bonded and have indemnified PVR against
any and all future environmental liabilities.  PVR regularly visits
its coal properties to monitor lessee compliance with environmental laws and
regulations and to review mining activities.  PVR’s management
believes that its operations and those of its lessees comply with existing laws
and regulations and does not expect any environment-related material adverse
impact on its financial condition or results of operations.




As of
September 30, 2009 and December 31, 2008, PVR’s environmental liabilities were
$1.1 million and $1.2 million, which represents PVR’s best estimate of the
liabilities as of those dates related to its coal and natural resource
management and natural gas midstream businesses.  PVR has reclamation
bonding requirements with respect to certain unleased and inactive
properties.  Given the uncertainty of when a reclamation area will
meet regulatory standards, a change in this estimate could occur in the
future.




Summary
of Critical Accounting Policies and 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.  Our most critical
accounting policies which involve the judgment of our management were fully
disclosed in our Annual Report on Form 10-K for the year ended December 31, 2008
and remained unchanged as of September 30, 2009.




25




Recent
Accounting Pronouncements




See Note
12, “New Accounting Standards,” in the Notes to Condensed Consolidated Financial
Statements in Item 1, “Financial Statements,” for a description of recent
accounting pronouncements.




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.  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, NGLs and
    coal;




·
            PVR’s
      ability to access external sources of
capital;




·
            any
      impairment writedowns of PVR’s
assets;




·
            the
      relationship between natural gas, NGL and coal
  prices;




·
            the
      projected demand for and supply of natural gas, NGLs and
    coal;




·
            competition
      among producers in the coal industry generally and among natural gas
      midstream companies;




·
            the
      extent to which the amount and quality of actual production of PVR’s coal
      differs from estimated recoverable coal
  reserves;




·
            PVR’s
      ability to generate sufficient cash from its businesses to maintain and
      pay the quarterly distribution to its general partner and its
      unitholders;




·
            the
      experience and financial condition of PVR’s coal lessees and natural gas
      midstream customers, including PVR’s lessees’ ability to satisfy their
      royalty, environmental, reclamation and other obligations to PVR and
      others;




·
            operating
      risks, including unanticipated geological problems, incidental to PVR’s
      coal and natural resource management or natural gas midstream
      businesses;




·
            PVR’s
      ability to acquire new coal reserves or natural gas midstream assets and
      new sources of natural gas supply and connections to third-party pipelines
      on satisfactory terms;




·
            PVR’s
      ability to retain existing or acquire new natural gas midstream customers
      and coal lessees;




·
            the
      ability of PVR’s lessees to produce sufficient quantities of coal on an
      economic basis from PVR’s reserves and obtain favorable contracts for such
      production;




·
            the
      occurrence of unusual weather or operating conditions including force
      majeure events;




·
            delays
      in anticipated start-up dates of PVR’s lessees’ mining operations and
      related coal infrastructure projects and new processing plants in the PVR
      natural gas midstream segment’s
business;




·
            environmental
      risks affecting the mining of coal reserves or the production, gathering
      and processing of natural gas;




·
            the
      timing of receipt of necessary governmental permits by PVR or its
      lessees;




·
            hedging
      results;




·
            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;




26




·
            risks
      and uncertainties relating to general domestic and international economic
      (including inflation, interest rates and financial and credit markets) and
      political conditions (including the impact of potential terrorist
      attacks); and




·
            other
      risks set forth in our Annual Report on Form 10-K for the year ended
      December 31, 2008.




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, 2008.  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.


27


Item
3    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 PVR is exposed are as
follows:




·
            Price
      Risk




·
            Interest
      Rate Risk




·
            Customer
      Credit Risk




As a
result of PVR’s risk management activities as discussed below, PVR is also
exposed to counterparty risk with financial institutions with whom PVR enters
into these risk management positions.  Sensitivity to these risks has
heightened due to the deterioration of the global economy, including financial
and credit markets.




Price
Risk




PVR’s
price risk management program permits the utilization of derivative financial
instruments (such as swaps, costless collars and three-way collars) to seek to
mitigate the price risks associated with fluctuations in natural gas, NGL and
crude oil prices as they relate to the PVR natural gas midstream
segment.  The derivative financial instruments are placed with major
financial institutions that PVR believes are of acceptable credit
risk.  The fair values of PVR’s price derivative financial instruments
are significantly affected by fluctuations in the prices of natural gas, NGLs
and crude oil.




At
September 30, 2009, we reported a commodity derivative asset related to the PVR
natural gas midstream segment of $4.8 million.  The contracts
underlying such commodity derivative asset are with four counterparties, all
which are investment grade financial institutions, and such commodity derivative
asset is substantially concentrated with one 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.  PVR
neither paid nor received collateral with respect to its derivative
positions.  The maximum amount of loss due to credit risk if
counterparties to PVR’s 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 September 30, 2009.  No significant uncertainties related to the
collectability of amounts owed to PVR exist with regard to these
counterparties.




For the
nine months ended September 30, 2009, we reported net derivative losses of $12.0
million.  Because PVR no longer uses hedge accounting for its
commodity derivatives, we recognize changes in fair value in earnings currently
in the derivatives line item on our condensed consolidated statements of
income.  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 PVR’s commodity derivative contracts.  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 4, “Derivative Instruments,”
in the Notes to Condensed Consolidated Financial Statements in Item 1,
“Financial Statements,” for a further description of PVR’s derivatives
program.


28


The
following table lists PVR’s commodity derivative agreements and their fair
values as of September 30, 2009:




Average
                                            
                                            
                                            
                                            
                                            
                                            Weighted
      Average PriceVolume
      Per
                                            
                                            
                                            
                                            
                                            
                                            Additional
      Put
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            Fair
      Value atDay
                                            
                                            
                                            Swap
      Price
                                            
                                            
                                            Option
                                            
                                            
                                            Put
                                            
                                            
                                            Call
                                            
                                            
                                            September
      30, 2009(in
      thousands)Crude
      Oil Three-Way Collar
                                            
                                            (barrels)
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            ($
      per barrel)Fourth
      Quarter 2009
                                            
                                            
                                            1,000
                                            
                                            
                                            
                                            
                                            
                                            
                                            70.00
                                            
                                            
                                            
                                            90.00
                                            
                                            
                                            
                                            119.25
                                            
                                            
                                            $
                                            1,433Frac
      Spread Collar
                                            
                                            (MMBtu)
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            ($
      per MMBtu)Fourth
      Quarter 2009
                                            
                                            
                                            6,000
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            9.09
                                            
                                            
                                            
                                            13.94
                                            
                                            
                                            
                                            864Crude
      Oil Collar
                                            
                                            (barrels)
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            ($
      per barrel)First
      Quarter 2010 through Fourth Quarter 2010
                                            
                                            
                                            750
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            70.00
                                            
                                            
                                            
                                            81.25
                                            
                                            
                                            
                                            228First
      Quarter 2010 through Fourth Quarter 2010
                                            
                                            
                                            1,000
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            68.00
                                            
                                            
                                            
                                            80.00
                                            
                                            
                                            
                                            (155
                                            )Natural
      Gas Purchase Swap
                                            
                                            (MMBtu)
                                            
                                            
                                            ($
      per MMbtu)First
      Quarter 2010 through Fourth Quarter 2010
                                            
                                            
                                            5,000
                                            
                                            
                                            
                                            5.815
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            709Settlements
      to be received in subsequent period
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            1,742Natural
      gas midstream segment commodity derivatives - net asset
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            
                                            $
                                            4,821




PVR
estimates that a $5.00 per barrel increase in the crude oil price would decrease
the fair value of PVR’s crude oil collars by $0.8 million.  PVR
estimates that a $5.00 per barrel decrease in the crude oil price would increase
the fair value of PVR’s crude oil collars by $4.8 million.  PVR
estimates that a $1.00 per MMBtu increase in the natural gas price would
increase the fair value of PVR’s natural gas purchase swap by $2.5
million.  PVR estimates that a $1.00 per MMBtu decrease in the natural
gas price would decrease the fair value of PVR’s natural gas purchase swap by
$1.1 million.




In
addition, PVR estimates that a $1.00 per MMBtu increase in the natural gas
purchase price and a $4.65 per barrel increase in the natural gasoline (a
natural gas liquid) sales price would increase the fair value of PVR’s frac
spread collar by $2.0 million.  PVR estimates that a $1.00 per MMBtu
decrease in the natural gas purchase price and a $4.65 per barrel decrease in
the natural gasoline sales price would increase the fair value of PVR’s frac
spread collar by $2.1 million.  These estimated changes exclude
potential cash receipts or payments in settling PVR’s derivative
positions.




PVR
estimates that, excluding the effects of derivative positions described above,
for every $1.00 per MMBtu increase or decrease in the natural gas price, PVR’s
natural gas midstream gross margin and operating income for the remainder of
2009 would increase or decrease by $1.3 million.  In addition, PVR
estimates that for every $5.00 per barrel increase or decrease in the crude oil
price, PVR’s natural gas midstream gross margin and operating income for the
remainder of 2009 would increase or decrease by $1.2 million.  This assumes
that natural gas prices, crude oil prices and inlet volumes remain constant at
anticipated levels.  These estimated changes in PVR’s gross margin and
operating income exclude potential cash receipts or payments in settling these
derivative positions.




29




Interest
Rate Risk




As of
September 30, 2009, PVR had $628.1 million of outstanding indebtedness under the
PVR Revolver, which carries a variable interest rate throughout its
term.  PVR entered into the PVR Interest Rate Swaps to establish fixed
interest rates on a portion of the outstanding borrowings under the PVR
Revolver.  Until March 2010, the notional amounts of the PVR Interest
Rate Swaps total $310.0 million, or 49.4% of PVR’s outstanding indebtedness
under the PVR Revolver as of September 30, 2009, with PVR paying a weighted
average fixed rate of 3.54% on the notional amount, and the counterparties
paying a variable rate equal to the three-month LIBOR. From March 2010 to
December 2011, the notional amounts of the PVR Interest Rate Swaps total $250.0
million, or 39.8% of PVR’s outstanding indebtedness under the PVR Revolver as of
September 30, 2009, with PVR paying a weighted average fixed rate of 3.37% on
the notional amount, and the counterparties paying a variable rate equal to the
three-month LIBOR.  From December 2011 to December 2012, the notional
amounts of the PVR Interest Rate Swaps total $100.0 million, or 15.9%
of  PVR’s outstanding indebtedness under the PVR Revolver as of
September 30, 2009, with PVR paying a weighted average fixed rate of 2.09% on
the notional amount, and the counterparties paying a variable rate equal to the
three-month LIBOR.  The PVR Interest Rate Swaps extend one year past the
current maturity of the PVR Revolver.  A 1% increase in short-term
interest rates on the floating rate debt outstanding under the PVR Revolver (net
of amounts fixed through the PVR Interest Rate Swaps) as of September 30, 2009
would cost PVR approximately $3.2 million in additional interest expense per
year.





During
the first quarter of 2009, PVR discontinued hedge accounting for all of the PVR
Interest Rate Swaps.  Accordingly, subsequent fair value gains and
losses for the PVR Interest Rate Swaps are recognized in earnings
currently.  Therefore, PVR’s results of operations are affected by the
volatility of changes in fair value, which fluctuates with changes in interest
rates.  These fluctuations could be significant.  See Note
4, “Derivative Instruments,” in the Notes to Condensed Consolidated Financial
Statements in Item 1, “Financial Statements,” for a further description of PVR’s
derivatives program.




Customer
Credit Risk




We are
exposed to the credit risk of PVR’s natural gas midstream customers and coal
lessees.  For the nine months ended September 30, 2009, two of PVR’s
natural gas midstream segment customers accounted for $83.0 million and $49.2
million, or 18% and 11%, of our total consolidated revenues.  At
September 30, 2009, 23% of our consolidated accounts receivable related to these
customers.  No significant uncertainties related to the collectability of
amounts owed to PVR exist in regard to these two natural gas midstream
customers.




This
customer concentration increases PVR’s exposure
to credit risk on its accounts receivables, because the financial insolvency of
any of these customers could have a significant impact on PVR’s results of
operations.If PVR’s natural gas midstream customers or coal
lessees become financially insolvent, they may not be able to continue to
operate or meet their payment obligations to PVR.  Any material losses
as a result of customer or lessee defaults could harm and have an adverse effect
on PVR’s business, financial condition or results of
operations.  Substantially all of PVR’s trade accounts receivable are
unsecured.




To
mitigate the risks of nonperformance by its natural gas midstream customers, PVR
performs ongoing credit evaluations of its existing customers.  PVR
monitors individual customer payment capability in granting credit arrangements
to new customers by performing credit evaluations, seek to limit credit to
amounts PVR believes the customers can pay and maintains reserves PVR believes
are adequate to cover exposure for uncollectible accounts.  As of
September 30, 2009, no receivables were collateralized, and we had a $1.4
million allowance for doubtful accounts, of which $1.3 million was related to
the PVR natural gas midstream segment.


30


Item
4    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 September 30, 2009.  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 September 30, 2009, such
disclosure controls and procedures were effective.




(b)      Changes
in Internal Control Over Financial Reporting





No
changes were made in our internal control over financial reporting during our
last fiscal quarter that have materially affected, or are reasonably likely to
materially affect, our internal control over financial
reporting.


31


PART
II.    OTHER INFORMATION





Item
1A    Risk
Factors





If
Penn Virginia sells all or a significant part of its remaining partner interests
in us, our strategic and operational objectives may change.





In
September 2009, Penn Virginia sold approximately one-third of its limited
partner interest in us, constituting approximately 26% of our common
units.  Following such sale, Penn Virginia continued to own the
general partner interest in us and approximately 51% of our common
units.  Penn Virginia may sell all or part of its remaining partner
interests in us without our consent or the consent of our
unitholders.





Several
of the members of our and PVR’s management team, including the Chief Executive
Officer and Chief Financial Officer of our general partner and PVR’s general
partner, are also members of Penn Virginia’s management team.  If Penn
Virginia sells all or a significant part of its remaining partner interests in
us, our general partner and PVR’s general partner may replace some or all of
those officers with new members of a management team that may have different
strategic or operational objectives for us or PVR.  A change in
strategic or operational objectives could affect our results of operations and
cash available for distribution.





Item
6    Exhibits





10.1
              Underwriting
      Agreement, dated September 10, 2009, among Penn Virginia GP Holdings,
      L.P., Penn Virginia Resource GP Corp., PVG GP, LLC and Barclays Capital
      Inc., UBS Securities LLC, J.P. Morgan Securities Inc. and Wells Fargo
      Securities, LLC, as representatives of the several underwriters listed
      therein (incorporated by reference to Exhibit 1.1 to the Registrant’s
      Current Report on Form 8-K filed on September 14,
2009).12.1
              Statement
      of Computation of Ratio of Earnings to Fixed Charges
      Calculation.31.1
              Certification
      Pursuant to Exchange Act Rule 13a-14(a) or Rule 15d-14(a), as Adopted
      Pursuant to Section 302 of the Sarbanes-Oxley Act of
  2002.31.2
              Certification
      Pursuant to Exchange Act Rule 13a-14(a) or Rule 15d-14(a), 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.


32


SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.





PENN
      VIRGINIA GP HOLDINGS, L.P.By:
                PVG
      GP, LLCDate:    
      November 5, 2009
                By:
                /s/ Frank A. PiciFrank
      A. PiciVice
      President and Chief Financial OfficerDate:    
      November 5, 2009
                By:
                /s/ Forrest W. McNairForrest
      W. McNairVice
      President and
Controller


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