Share-Based Compensation

The Penn Virginia Corporation 2013 Amended and Restated Long-Term Incentive Plan (the “LTI Plan”) permits the grant of incentive and nonqualified stock options, common stock, deferred common stock units, restricted stock and restricted stock units to our employees and directors. As of December 31, 2014, there were 2,899,309 shares available for issuance to employees and directors pursuant to the LTI Plan.

With the exception of performance-based restricted stock units (“PBRSUs”), all of the awards issued under our LTI Plan are classified as equity instruments because they result in the issuance of common stock on the date of grant, upon exercise or are otherwise payable in common stock upon vesting, as applicable. The compensation cost attributable to these awards is measured at the grant date and recognized over the applicable vesting period as a non-cash item of expense. Because the PBRSUs are payable in cash, they are considered liability-classified awards and are included in the Other liabilities caption on our Consolidated Balance Sheets. Compensation cost associated with the PBRSUs is measured at the end of each reporting period and recognized based on the period of time that has elapsed during each of the individual performance periods.

The following table summarizes share-based compensation expense recognized for the periods presented:



	Year Ended December 31,
	2014		2013		2012
Equity-classified awards:
Stock option awards	$	1,598	$	3,123	$	4,424
Common, deferred, restricted and restricted unit awards	2,029		2,658		1,923
	3,627		$	5,781	$	6,347
Liability-classified awards	4,520		4,116		714
	$	8,147	$	9,897	$	7,061

Stock Options

The exercise price of all stock options granted under the LTI Plan is equal to the fair market value of our common stock on the date of the grant. Options may be exercised at any time after vesting and prior to ten years following the date of grant. Options vest upon terms established by the compensation and benefits committee of our board of directors (the “Committee”). Generally, options vest over a three-year period, with one-third vesting in each year. In addition, all options will vest upon a change of control of us, as defined in the LTI Plan. In the case of employees, if a grantee’s employment terminates (i) for cause, all of the grantee’s options, whether vested or unvested, will be forfeited, (ii) by reason of death or disability, the grantee’s options will vest and remain exercisable for one year and (iii) for any other reason, the grantee’s unvested options will be forfeited and the grantee’s vested options will remain exercisable for 90 days. For awards granted in 2013, all of the grantee’s options will vest when the grantee becomes retirement eligible (age 62 and providing 10 consecutive years of service). For awards granted in 2012, all of the grantee’s options will vest if or when the grantee retires following becoming retirement eligible. We have historically issued new shares to satisfy stock option exercises.

The fair value of each option award is estimated on the date of grant using the Black-Scholes-Merton option-pricing formula that uses the assumptions noted in the following table. Expected volatilities are based on historical changes in the market value of our stock. Separate groups of employees that have similar historical exercise behavior are considered separately to estimate expected lives. Options granted have a maximum term of ten years. We base the risk-free interest rate on the U.S. Treasury rate for the week of the grant having a term equal to the expected life of the option.



	2014	2013	2012
Expected volatility	56.2% to 63.7%	56.9% to 70.1%	67.3% to 72.9%
Dividend yield	0.00% to 0.00%	0.00% to 0.00%	2.25% to 4.98%
Expected life	3.5 to 4.6 years	3.5 to 4.6 years	3.5 to 4.6 years
Risk-free interest rate	0.82% to 1.63%	0.34% to 0.58%	0.36% to 0.51%

The following table summarizes activity for our most recent fiscal year with respect to stock options:



	Shares Under Options		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at beginning of year	3,129,069		$	16.15
Granted	367,016		16.15
Exercised	(257,347	)	5.55
Forfeited or expired	(144,722	)	19.24
Outstanding at end of year	3,094,016		$	16.89	6.0	$	2,005
Exercisable at end of year	2,221,701		$	19.90	5.0	$	907

The weighted-average grant-date fair value of options granted during the years ended December 31, 2014, 2013 and 2012, respectively, was $7.46, $2.35 and $2.54 per option. The total intrinsic value of options exercised during the years ended December 31, 2014 and 2013 was $2.3 million and less than $0.1 million. There were no options exercised during 2012.

As of December 31, 2014, we had $2.8 million of unrecognized compensation cost related to unvested stock options. We expect that cost to be recognized over a weighted-average period of 1.0 years. The total grant-date fair values of stock options that vested in 2014, 2013 and 2012 were $1.8 million, $2.7 million and $4.7 million, respectively.

Common Stock

A portion of the compensation paid to certain non-employee members of our board of directors is paid in common stock. Each share of common stock granted as compensation vests immediately upon issuance. In 2014, 2013 and 2012 respectively, we granted 15,501, 77,598 and 79,700 shares of common stock to our non-employee directors at a weighted-average grant date fair value of $11.61, $5.39 and $5.33 per share.

Deferred Common Stock Units

A portion of the compensation paid to certain non-employee members of our board of directors is paid in deferred common stock units. Each deferred common stock unit represents one share of common stock, vests immediately upon issuance, and is available to the holder upon termination or retirement from our board of directors. Deferred common stock units awarded to directors receive all cash or other dividends we pay on shares of our common stock.

The following table summarizes activity for our most recent fiscal year with respect to awarded deferred common stock units:



	Deferred Common Stock Units	Weighted-Average Grant Date Fair Value
Balance at beginning of year	217,708	$	13.01
Granted	36,171	11.61
Converted	—	—
Balance at end of year	253,879	$	12.81

As of December 31, 2014, 2013 and 2012, shareholders’ equity included deferred compensation obligations of $3.2 million, $2.8 million and $3.1 million, respectively, and corresponding amounts for treasury stock.

Restricted Stock

Restricted stock vests upon terms established by the Committee and as specified in the award agreement. Restricted stock vests generally over a three-year period, with one-third vesting in each year. We recognize compensation expense on a straight-line basis over the vesting period.

There were no unvested restricted stock awards outstanding and no restricted stock vested during 2014, 2013 and 2012.

Restricted Stock Units

A restricted stock unit entitles the grantee to receive a share of common stock upon the vesting of the restricted stock unit or, at the discretion of the Committee, the cash equivalent of the fair market value of a share of common stock. The Committee determines the time period over which restricted stock units will vest. In addition, all restricted stock units will vest upon a change of control of us. Unless and to the extent the Committee determines otherwise, (i) if an employee’s employment with us or our affiliates terminates for any reason other than death or disability, the grantee’s restricted stock units will be forfeited and (ii) if a grantee dies or becomes disabled, the grantee’s restricted stock units will vest. Awards granted prior to 2014 also vest if or when the grantee becomes retirement eligible. If restricted stock units vest early on account of retirement eligibility, payment on the restricted stock units will be made when the restricted stock units would have originally vested, even if that is after retirement. Restricted stock units generally vest over a three-year period, with one-third vesting in each year. Prior to 2013, the Committee, in its discretion, could grant tandem dividend equivalent rights with respect to restricted stock units. Beginning in 2013, the Committee may not grant dividend equivalent rights. A dividend equivalent right is a right to receive an amount in cash equal to, and 30 days after, the cash dividends made with respect to a share of common stock during the period such restricted stock unit is outstanding. Payments of dividend equivalent rights associated with restricted stock units that are expected to vest are recorded as dividends; payments associated with restricted stock units that are not expected to vest are recorded as compensation expense.

The following table summarizes activity for our most recent fiscal year with respect to awarded restricted stock units:



	Restricted Stock Units		Weighted-Average Grant Date Fair Value
Balance at beginning of year ¹	500,850		$	4.42
Granted	191,483		16.32
Vested	(92,986	)	6.29
Forfeited	—		—
Balance at end of year¹	599,347		$	7.93

_____________________

¹ Excludes 346,777 units at the beginning of the year and 346,777 units at the end of year that have vested due to retirement eligibility, but have not yet been settled or converted to common shares.

As of December 31, 2014, we had $3.2 million of unrecognized compensation cost attributable to unvested restricted stock units. We expect that cost to be recognized over a weighted-average period of 1.1 years. The total grant-date fair values of restricted stock units that vested in 2014, 2013 and 2012 were $0.6 million, $1.7 million and $1.4 million, respectively.

Performance-Based Restricted Stock Units

In May 2014, May 2013 and February 2012, we granted PBRSUs to certain executive officers. Vested PBRSUs are payable solely in cash on the third anniversary of the date of grant based upon the achievement of specified market-based performance metrics with respect to each of a one-year, two-year and three-year performance period, in each case commencing on the date of grant. The number of PBRSUs vested can range from 0% to 200% of the initial grant. The PBRSUs do not have voting rights and do not participate in dividends.

Except as noted below, if the grantee’s employment terminates for any reason prior to the third anniversary of the grant date, then the grantee’s PBRSUs will be forfeited and no cash will be payable with respect to any PBRSUs. If the grantee’s employment terminates for any reason other than cause prior to the third anniversary of the grant date, then all of the grantee’s PBRSUs will vest and become payable in the amount and at the time the PBRSUs would have otherwise vested and been payable. Awards granted prior to 2014 also vest if or when the grantee becomes retirement eligible. If the grantee dies or becomes disabled prior to the third anniversary of the grant date, a pro-rated share (based on the number of days employed during the three-year vesting period) of the PBRSUs will vest and the grantee will be paid for such PBRSUs at the target percentage at the end of the end of the original three-year vesting period. In the event of a change in control of us, all of the grantee’s PBRSUs will immediately vest and the grantee will be paid for such PBRSUs following the change in control at the target percentage (regardless of our actual market-based performance) and using the value of our common stock on the effective date of the change in control (calculated as the closing price of our common stock on the effective date of the change in control).

The compensation cost of the PBRSUs is based on the fair value derived from a Monte Carlo model. The Monte Carlo model is a binomial valuation model that utilizes certain assumptions, including expected volatility, dividend yield, risk-free interest rates and a measure of total shareholder return.

The ranges for the assumptions used in the Monte Carlo model for the PBRSUs granted in 2014, 2013 and 2012 are as follows:



	2014	2013	2012
Expected volatility	52.6% to 72.3%	51.3% to 66.7%	29.3% to 78.0%
Dividend yield	0.0% to 0.0%	0.0% to 0.0%	0.0% to 5.3%
Risk-free interest rate	0.02% to 1.07%	0.01% to 0.78%	0.02% to 0.43%

The following table summarizes activity for our most recent fiscal year with respect to PBRSUs:



	Performance-Based Restricted Stock Units	Weighted-Average Fair Value
Balance at beginning of year	561,310	$	16.07
Granted	97,606	19.21
Forfeited	—	—
Balance at end of year	658,916	$	16.29

As of December 31, 2014, $2.9 million, representing amounts currently payable in cash in 2015, is included in the Accounts payable and accrued expenses caption and $6.4 million, which represents the fair value of the noncurrent outstanding PBRSUs, is included in the Other liabilities caption on our Consolidated Balance Sheets.