-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LIL2+0bRKKsCGEJ0StYLYUINvsbxnj/DZZ2zJpjYKDRNsdp0oKyT4kdoAkPLf6+r MfjigbhKYqhWE90pGu4PEw== 0000077159-98-000030.txt : 19980327 0000077159-98-000030.hdr.sgml : 19980327 ACCESSION NUMBER: 0000077159-98-000030 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980326 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PENN VIRGINIA CORP CENTRAL INDEX KEY: 0000077159 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 231184320 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-13283 FILM NUMBER: 98574222 BUSINESS ADDRESS: STREET 1: 100 MATSONFORD ROAD SUITE 200 STREET 2: ONE RADNOR CORPORATE CENTER CITY: RADNOR STATE: PA ZIP: 19087 BUSINESS PHONE: 6106878900 MAIL ADDRESS: STREET 1: 800 BELLEVUE 200 S BROAD ST CITY: PHILADELPHIA STATE: PA ZIP: 19102 FORMER COMPANY: FORMER CONFORMED NAME: VIRGINIA COAL & IRON CO DATE OF NAME CHANGE: 19670501 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE ----- SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 1997 or ----- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 0-753 ------------------------------ PENN VIRGINIA CORPORATION One Radnor Corporate Center, Suite 200 100 Matsonford Road Radnor, PA 19087 Registrant's telephone number, including area code: (610) 687-8900 Incorporated in I.R.S Employer Identification Number VIRGINIA 23-1184320 Securities registered pursuant to section 12(b) of the Act: None Securities Registered pursuant to Section 12(g) of the Act: Title of Each Class Name of Exchange on which registered - ------------------- ------------------------------------ Common Stock, New York Stock Exchange $6.25 Par Value 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 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes __X__ No_____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10- K or any amendment to this Form 10-K. ____________ The aggregate market value of the voting stock held by non-affiliates of the Corporation at March 6, 1998 was 225,623,406, based on the closing price of $27.25 per share. As of that date, 8,279,758 shares of common stock were issued and outstanding. The number of shareholders of record of the registrant was 910 as of March 6, 1998. __________________________ DOCUMENTS INCORPORATED BY REFERENCE: Part Into Which Incorporated ------------------ Proxy Statement for Stockholder Part III Meeting on May 5, 1998 Penn Virginia Corporation and Subsidiaries Part I 1. Business 2. Properties 3. Legal 4. Submission of matters to a vote of security holders Part II 5. Market for Registrant's Common Equity and Related Stockholder Matters 6. Selected Financial Data 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 8. Financial Statements and Supplementary Data 9. Changes in and disagreements with accountants on accounting and financial disclosure Part III 10. Directors and Executive Officers of the Registrant 11. Executive Compensation 12. Security Ownership of Certain Beneficial Owners and Management 13. Certain Relationships and related Transactions Part IV 14. Exhibits, Financial Schedules and Reports on Form 8-K Part 1 ITEM 1 - BUSINESS General - ------- Penn Virginia Corporation ("Penn Virginia" or the "Company"), is a Virginia corporation founded in 1882. The Company is engaged in the exploration, development and production of oil and natural gas and the collection of royalties and overriding royalty interests on various oil and gas properties; the leasing of coal mineral rights and the collection of related royalties. Penn Virginia explores for, develops and produces crude oil, condensate and natural gas in the Appalachian Basin. Its oil and gas operations are concentrated in western Virginia, southern West Virginia and eastern Kentucky. The Company had proved reserves of approximately 424,000 barrels of oil and condensate and 172 billion cubic feet of natural gas at December 31, 1997. The Company owns the mineral rights to approximately 380 million tons of recoverable coal reserves located in Virginia, West Virginia and Kentucky. Its coal reserves include both surface and underground mineable seams. The reserves are generally high quality, low-sulfur bituminous coal and are leased to various operators. Financial Information - --------------------- The Company operates in two primary business segments: (1) oil and gas and (2) coal and land. Financial information concerning the Company's business segments can be found in Note 15 (Segment Information) of the Notes to the Consolidated Financial Statements of Penn Virginia Corporation which is included in this report. Oil and Gas - ----------- Overview Penn Virginia's oil and gas properties are concentrated in western Virginia, southern West Virginia and eastern Kentucky. At December 31, 1997, the Company had approximately 174.1 Bcfe of proved reserves (171.6 Bcf of natural gas) including 158.3 Bcfe of working interests and 15.8 Bcfe of royalty interests. Production During 1997, 38,000 barrels of oil and condensate and 7.8 Bcf of natural gas, net to the Company's interest, were produced compared with 47,000 barrels and 7.5 Bcf in 1996. Prices received by the Company were $17.39 and $18.43 per barrel and $2.81 and $2.84 per Mcf for oil and gas in 1997 and 1996, respectively. Exploration and Development The Company drilled 62 net wells in 1997 of which 43 were development and 19 were exploratory. A total of 3.0 net wells were dry holes. In addition, 6.0 net exploratory wells were being evaluated and tested at year- end. The successful wells added approximately 17.9 Bcfe of proved reserves, replacing 224 percent of 1997 production. Transportation The Company transports its natural gas to market on various gathering, transmission and pipeline systems owned primarily by third parties. Approximately forty-five percent of the Company's natural gas is gathered by Consolidated Natural Gas "CNG" and Columbia Natural Resources "CNR". Interruptible gathering rates have increased in recent years as pipelines have implemented the mandatory unbundling of gathering services (Federal Energy Regulatory Commission Order 636) from other transportation services. CNG's interruptible gathering rates will increase from 14.4 cents to 15.4 cents per MMbtu effective for 1998. CNR's interruptible gathering rates will increase from 25 cents to 26 cents per MMbtu effective February 1, 1998. Penn Virginia's natural gas production is transported to market primarily on two major transmission systems. Columbia Gas Transmission transports approximately 60 percent and CNG Transmission transports approximately 30 percent. Production can be adversely affected by shutdowns of the pipelines for maintenance or replacement as pipeline flexibility is limited. Marketing Penn Virginia sold its natural gas on the spot market or through fixed price physical contracts in 1997. In addition, the Company entered into commodity derivative contracts to reduce the risk caused by fluctuations in the price of natural gas. In April 1997, Penn Virginia executed a contract for a participating forward swap for 5,000 MMbtu's per day with a floor price of $2.10 per MMbtu and a re-entry price of $2.48 per MMbtu for the period of May 1997 through October 1999. In September 1997, the Company completed a second participating forward swap for an additional 5,000 MMbtu's per day with a floor price of $2.10 per MMbtu and a re-entry price of $2.35 per MMbtu for the period of November 1997 through October 1999. The Company has hedged in 1998 either through physical contracts or financial commodity instruments approximately 70 percent of anticipated 1998 production at an average floor price of approximately $2.60 per Mcf. Penn Virginia may use additional contracts to reduce the risk of price fluctuations in 1998 and beyond. Coal and Land Operations - ------------------------ Overview Penn Virginia owned approximately 130,000 acres of coal, timber and natural gas bearing land in Virginia, West Virginia and Kentucky at December 31, 1997. Coal is mined by several operators according to long-term lease agreements which generally require royalty payments to Penn Virginia based on a minimum annual payment, a minimum dollar royalty per ton and/or a percentage of the coal's selling price. The Company's timber assets consist of various hardwoods, primarily red oak, white oak, yellow poplar and black cherry. The Company owns approximately 206 million board feet of standing saw timber. Coal Production Various operators mined 5.4 million tons of coal from Penn Virginia's properties in 1997 and paid an average royalty rate of $2.14 per ton compared with 3.4 million tons mined in 1996 at an average royalty rate of $2.07 per ton. West Virginia In July 1996, the Company purchased the Bull Creek coal and timber property in West Virginia for approximately $8.0 million. The purchase included 15,000 acres holding an estimated 17 million recoverable tons of relatively low sulfur, high Btu coal reserves and 2.2 MMbf of high quality hardwood standing saw timber. Simultaneous with the acquisition, the Company entered into a long-term lease with the seller for the mining of the coal reserves. Penn Virginia expected the seller to begin coal production in 1998 and gradually increase production to approximately 1.5 tons per year. The coal lessee subsequently filed for protection under Chapter 11 of the Federal Bankruptcy code in July 1997. Negotiations with third party coal operators to assume the coal lease on this property are on-going. Coal mining operations can commence immediately upon assumption of the lease by a qualified operator and the approval of United States Bankruptcy Court. The Spruce Laurel property in West Virginia contains approximately 68 millions tons of recoverable coal leased to various operators under six lease agreements. New mining permits were issued during 1997 to a lessee for approximately 25 million tons of the Spruce Laurel reserves and mining commenced in the fourth quarter. There is active mining on two of the remaining five leases. Mine operators on the Spruce Laurel property mined 1,319,000 tons of coal and paid an average royalty of $2.23 per ton in 1997 compared with 1,094,000 tons in 1996 and an average royalty rate of $2.20 per ton. Virginia During 1997, operators mined 4,103,000 tons of coal in Virginia and paid an average royalty rate of $2.12 per ton compared with 2,287,000 tons of coal in 1996 at an average royalty rate of $2.01 per ton. Significant development of the Wise properties, principally leased to Westmoreland Coal Company until May 1996, continued during the year. Eight mining permits were obtained and seven new mines were constructed during the year. Twenty-three lessees produced 3,222,000 tons of coal at an average royalty rate of $2.10 per ton. This compares to 2,287,000 tons produced in 1996 at an average royalty rate of $2.01 per ton. Production from new lessees accounted for 935,000 tons of the total production from the Wise properties during the year. Production from the Wise property is expected to increase steadily during 1998 and 1999. In January 1997, the Company acquired the Buchanan properties in Virginia consisting of 6,500 acres with mining rights to an additional 13,100 acres. The property contains an estimated 10.5 million recoverable tons of high quality metallurgical and steam coal. The properties produced 881,000 tons of coal in 1997 under three lease agreements. The ownership of the principal purchaser of the production from the property changed in the first quarter 1998 resulting in a disruption of a portion of the production. The duration of this interruption is unknown at this time. Production is expected to resume at levels similar to 1997 during 1998. In February 1997, Penn Virginia acquired approximately 7.5 million tons of recoverable coal on approximately 4,700 acres in Virginia adjacent to the Company's Kentucky properties. The coal is high quality, low sulfur coal suitable for the steam market. Production from the property should begin in 1999 after necessary mining and environmental permits are obtained. Timber Production The Company harvested and sold 7.9 million board feet for an average price of $206 per Mbf in 1997 compared with 4.0 million board feet for an average price of $183 per Mbf in 1996. In conjunction with the purchase of additional coal reserves in West Virginia described above, the Company acquired approximately 22 million board feet of standing hardwood timber. This property generated sales of 2.1 million board feet in 1997. The Company's timber resources are managed primarily on a sustained yield basis using various regeneration and intermediate stand improvement techniques. The sustained yield essentially allows for the harvest of an amount equal to the annual growth of timber within the stand. Timber is also harvested in advance of mining to prevent loss of the resource. Timber is sold in competitive bid sales involving individual parcels and also on a contract basis, where Penn Virginia pays independent contractors to harvest timber while the Company directly markets the product. Investments - ----------- The Company holds equity investments primarily in Norfolk Southern Corporation. See Note 13 (Investments and Other Income) of the Notes to the Consolidated Financial Statements for additional information. In the third quarter of 1997, Norfolk Southern Corporation declared a three for one stock split. The shares held by the Company increased from 1,102,400 shares to 3,307,200 shares as a result of the split. In the first quarter of 1997, the Company sold 750,000 shares of Westmoreland Coal Company (Westmoreland) stock. The sale had no significant effect on 1997 earnings as the Company recorded an impairment of its investment in Westmoreland stock in 1996. In the fourth quarter of 1996, Penn Virginia sold 598,600 shares of its Westmoreland common stock to various purchasers. In December 1996, Westmoreland filed Chapter 11, and therefore Penn Virginia wrote down its investment in the remaining 755,811 shares held at year end. The sale of this stock and subsequent impairment of the remaining 755,811 shares held at year end resulted in a $3.3 million pretax charge to earnings. In September 1996, the Company sold its sixteen percent interest in Westmoreland Resources, Inc., a joint venture that operates a Montana coal mine, to Westmoreland. Westmoreland Coal Company exercised an option received in conjunction with a portion of the Wise property coal reserve lease restructuring and coal reserve relinquishment. The Company received $3.0 million in cash. Also, in September 1996, the Company contributed 400,000 shares of its Westmoreland common stock to the Penn Virginia Corporation Benefits Trust Fund, which is a voluntary employee beneficiary association. This fund provides part of the life and medical benefits coverage for eligible retired employees of Penn Virginia. The fair value of the Company's equity portfolio at December 31, 1997 was $100.9 million compared with $97.4 million at December 31, 1996. Risks Associated with Business Activities - ----------------------------------------- General - ------- Government Regulations Penn Virginia's operating segments are subject to extensive rules and regulations promulgated by various federal, state and local government agencies. Failure to comply with such rules and regulations can result in substantial penalties. The regulatory burden increases the Company's cost of doing business and affects its profitability. Although the Company believes it is in material compliance with all rules, regulations and laws, there can be no assurance that new interpretations of existing rules, regulations and laws will not adversely affect the Company's business and operations. Competition The energy industry is highly competitive. Many of the Company's competitors are large, well-established companies with substantially larger operating staffs, greater capital resources and established long-term strategic positions. Oil and Gas - ----------- Prices Penn Virginia's revenues, profitability and future rate of growth are highly dependent on the prevailing prices for oil and gas, which are affected by numerous factors that are generally beyond the Company's control. Crude oil prices are generally determined by global supply and demand. Natural gas prices are influenced by national and regional supply and demand. A substantial or extended decline in the prices of oil or gas could have a material adverse effect on the Company's revenues, profitability and cash flow and could, under certain circumstances, result in an impairment of the Company's oil and gas properties. Exploratory Drilling Both development and exploratory drilling involve risks. However, exploratory drilling involves greater risks of dry holes or failure to find commercial quantities of hydrocarbons. The Company anticipates the number of exploratory prospects drilled in 1998 and future years may increase compared with previous years. Consequently, it is likely that the Company will experience increased levels of exploration expense in 1998 and future years. Transportation Penn Virginia's natural gas production is transported to market primarily on two major transmission systems. Columbia Gas Transmission transports approximately 60 percent and CNG Transmission transports approximately 30 percent. Production can be adversely affected by shutdowns of the pipelines for maintenance or replacement, as pipeline flexibility is limited. Coal and Land - ------------- Operating Risks Penn Virginia's coal royalty stream is impacted by several factors, which the Company generally cannot control. The number of tons mined annually is determined by an operator's mining efficiency, labor availability, geologic conditions, ability to market coal and ability to arrange reliable transportation to the end-user. Coal emissions are regulated by various federal and state agencies which affect the quality of coal that can be burned within compliance guidelines. Investments - ----------- The value of the Company's investment portfolio is subject to market price fluctuations. Employees - --------- Penn Virginia had 59 employees at December 31, 1997. The Company considers its relations with its employees to be good. Executive Officers of the Company - --------------------------------- Below is a list of executive officers of the Company including their ages and positions held. Each officer is elected annually by the Board of Directors and serves at the pleasure of the Board of Directors.
Office NAME Age Office Held Since - ----------------- --- -------------------------- ---------- A. James Dearlove 50 President and Chief 1996 Executive Officer Steven W. Tholen 47 Vice President and Chief 1995 Financial Officer David R. Barker 42 Vice President 1996 Keith D. Horton 44 Vice President 1996
A. James Dearlove - Mr. Dearlove is the President and Chief Executive Officer. He has served in various capacities with the Company since 1977 including Vice President since 1986, Senior Vice President since 1992 and President since 1994. Mr. Dearlove was elected to the Company's Board of Directors effective February 6, 1996. He was appointed Chief Executive Officer in May 1996. He also serves as director of the Powell River Project and the National Council of Coal Lessors. Steven W. Tholen - Mr. Tholen is a Vice President and the Chief Financial Officer. He joined the Company in 1995. Previously, he served in various capacities at Cabot Oil and Gas Corporation, most recently as Treasurer. David R. Barker - Mr. Barker is a Vice President. He also serves as President of the Company's oil and gas subsidiary. He joined the Company in 1996. Previously, he served as Senior Vice President with the Clinton Oil Company and in various capacities with Mitchell Energy Corporation and Mobil Exploration. Keith D. Horton - Mr. Horton is a Vice President. He also serves as President of the Company's coal and land management subsidiary. He has served in various capacities with the Company since 1981. Mr. Horton serves as Chairman of the Central Appalachian Section of the Society of Mining Engineers. He also serves as a director of the Virginia Mining Association, Powell River Project and the Virginia Coal Council. The following terms have the meanings indicated below when used in this report. Bbl - means a standard barrel of 42 U.S. gallons Bcf - means one billion cubic feet Bcfe - means one billion cubic feet equivalent with one barrel of oil or condensate converted to six thousand cubic feet of natural gas based on the estimated relative energy content Gross - acre or well means an acre or well in which a working interest is owned Mbbl - means one thousand barrels Mbf - means one thousand board feet Mcf - means one thousand cubic feet MMbtu - means one million British thermal units MMcf - means one million cubic feet Net - acres or wells is determined by multiplying the gross acres or wells by the working interest in those gross acres or wells Proved Reserves - means those estimated quantities of crude oil, condensate and natural gas that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known oil and gas reservoirs under existing economic and operating conditions ITEM 2 - PROPERTIES Oil and Gas - ----------- Production and Pricing The following table sets forth production, sales prices and production costs with respect to the Company's properties for the years ended December 31, 1997, 1996, 1995.
Year Ending December 31, 1997 1996 1995 - ------------------------------- ------ ------ ------ Production Oil and condensate (Mbbls) 38 47 58 Natural gas (MMcf) 7,755 7,483 7,161 Average sales price Oil and condensate ($/Bbl) $ 17.39 $ 18.43 $ 14.24 Natural gas ($/Mcf) $ 2.81 $ 2.84 $ 1.85 Production cost Operating cost per Mcfe $ 0.42 $ 0.39 $ 0.40 Production taxes per Mcfe $ 0.26 $ 0.26 $ 0.18 ------- -------- ------- Total production cost per Mcfe $ 0.68 $ 0.65 $ 0.58
Proved Reserves Penn Virginia had proved reserves of 424,000 barrels of crude oil and condensate and 172 Bcf of natural gas at December 31, 1997. The present value of the estimated future cash flows discounted at 10 percent (Pre-tax SEC PV10 Value) was $141 million. At December 31, 1997, the Company had 367 gross (220 net) proved undeveloped drilling locations.
Natural Pre-tax Oil and Natural Gas SEC PV10 Condensate Gas Equivalents Value (Mbbls) (Bcf) (Bcfe) ($MM) ---------- -------- ---------- -------- 1997 Developed 364 110 112 $ 110 Undeveloped 60 61 61 31 ----- ----- ----- ----- Total 424 172 173 $ 141 1996 Developed 390 105 107 $ 37 Undeveloped 64 70 71 49 --- --- --- ----- Total 454 175 178 $ 186 1995 Developed 348 86 89 $ 82 Undeveloped 83 84 84 35 --- --- --- ----- Total 431 170 173 $ 117
The average prices used to determine proved reserves at December 31, 1997, 1996 and 1995 were ($/Bbl) $15.50, $23.25 and $16.02, respectively for oil and condensate and ($/Mcf) $3.11, $3.74 and $2.67, respectively for natural gas. Such prices were prices in effect as of year end and may not be indicative of future sales prices received. Net proved oil and gas reserves as of December 31, 1997, were estimated by Wright and Company, Inc. of Brentwood, Tennessee. Net proved oil and gas reserved as of December 31, 1996 were estimated by the Company's engineers and were reviewed by Williamson Petroleum Consultants, Inc. (Williamson) of Houston, Texas. Net proved oil and gas reserves as of December 31, 1995 were estimated by Williamson. Since January 1, 1997, no oil or gas reserve information has been filed with, or included in any report to any U.S. authority or agency other than the SEC and the Energy Information Administration (EIA). The basis of reporting reserves to the EIA for the Company's reserves is identical to that set forth in the foregoing table. Proved reserves are the estimated quantities of natural gas and condensate that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are proved reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. The estimation of reserves requires substantial judgment on the part of petroleum engineers resulting in imprecise determinations, particularly with respect to recent discoveries. The accuracy of any reserve estimate depends on the quality of available data and engineering and geological interpretation and judgment. Results of drilling, testing, and production after the date of the estimate may result in revisions of the estimate. Accordingly, estimates of reserves are often materially different from the quantities of oil and condensate and natural gas that are ultimately recovered, and these estimates will change as future production and development information becomes available. The reserve data represent estimates only and should not be construed as being exact. Acreage The following table sets forth the Company's developed and undeveloped acreage at year end. The Company's acreage is concentrated in the Appalachia Basin, specifically western Virginia, southern West Virginia and eastern Kentucky.
Gross Acreage Net Acreage ------------- ----------- (in thousands) Developed 314 161 Undeveloped 111 47 --- --- Total 425 208
Gross Wells Drilled The following table sets forth the gross number of exploratory and development wells drilled during the last three years. The number of wells drilled means the number of wells spud at any time during the respective year. Productive wells means either wells which are producing or which are capable of commercial production.
Years Ended December 31, 1997 1996 1995 - ------------------------ ---- ---- ---- Exploratory Productive 21 - 2 Dry 3 1 - Under Evaluation 12 13 - --- --- -- Total 36 14 2 Years Ended December 31, 1997 1996 1995 - ------------------------ ---- ---- ---- Development Productive 53 50 31 Dry 1 1 1 --- --- --- Total 54 51 32
Of the 13.0 gross wells under evaluation at the end of 1996, 10 were productive and 3.0 were expensed as dry holes in 1997. Net Wells Drilled The following table sets forth the number of net exploratory and development wells. Net wells equal the number of gross wells multiplied by Penn Virginia's working interest in each of the gross wells.
Years Ended December 31, 1997 1996 1995 - ------------------------ ---- ---- ---- Exploratory Productive 11.0 - 2.0 Dry 2.0 0.1 - Under Evaluation 6.0 10.1 - ---- ---- ---- Total 19.0 10.2 2.0 Years Ended December 31, 1997 1996 1995 - ------------------------ ---- ---- ---- Development Productive 42.0 37.3 21.5 Dry 1.0 1.0 1.0 ---- ---- ---- Total 43.0 38.3 22.5
Of the 10.1 net wells under evaluation at the end of 1996, 7.1 were productive and 3.0 were expensed as dry holes in 1997. Productive Wells The number of productive oil and gas wells in which Penn Virginia had an interest at December 31, 1997 is set forth below. Productive wells are producing wells or wells capable of commercial production.
Operated Wells Non-Operated Wells Total -------------- ------------------ ------------- Gross Net Gross Net Gross Net ----- --- ----- --- ----- --- Oil 8 8 7 2 15 10 Gas 638 542 365 56 1,003 598 --- --- --- -- ----- --- Total 646 550 372 58 1,018 608
Coal and Land - ------------- Penn Virginia's coal reserves and timber assets at December 31, 1997 covered 130,000 acres in Virginia, West Virginia and Kentucky. The coal reserves are in various surface and underground seams. Penn Virginia's recoverable coal reserves are estimated at 380 million tons as of December 31, 1997. Recoverable coal reserves mean coal that is economically mineable using existing equipment and methods under federal and state laws now in effect. Reserve estimates are adjusted annually for production, unmineable areas and sales of coal in place. The majority of the Company's reserves are high in energy content, low in sulfur and suitable for either the steam or metallurgical markets. The amount of coal a lessee can profitably mine at any given time is subject to several factors and may be substantially different from "recoverable reserves." Included among the factors that influence profitability are the existing market price, coal quality and operating costs. The Company's timber assets consist of various hardwoods, primarily red oak, white oak, yellow poplar, and black cherry. The Company owns approximately 206 million board feet of standing saw timber. Coal Reserves The following table sets forth the coal reserves that are owned by the Company. The reserves are estimated internally by the Company's engineers.
1997 1996 1995 ----- ----- ----- (in millions) Beginning of year 357.6 227.1 257.8 Production (5.4) (3.4) (4.1) Additions, deletions, revisions 27.6 133.9 (26.6) ----- ----- ----- End of year 379.8 357.6 227.1
ITEM 3 - LEGAL PROCEEDINGS The Company is involved in various legal proceedings arising in the ordinary course of business. While the ultimate results of these cannot be predicted with certainty, Company management believes these claims will not have a material effect on the Company's financial position, liquidity or operations. ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the fourth quarter of fiscal year 1997. PART II ITEM 5 - MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Common Stock Market Prices And Dividends - ---------------------------------------- High and low stock prices and dividends for the last two years were:
1997 1996 -------------------------- ------------------------ Cash Cash Sales Price Dividends Sales Price Dividends ---------------- --------- -------------- --------- Quarter Ended: High Low Paid High Low Paid - ------------ ------- --------- ------ ------- --------- ------- March 31 $23-3/8 $21-1/2 $0.225 $18-1/4 $16-1/8 $0.225 June 30 $25-5/8 $20-3/8 $0.225 $19-1/8 $16 $0.225 September 30 $31 $23-7/8 $0.225 $18-3/4 $17 $0.225 December 31 $30-3/4 $26-15/16 $0.225 $24-1/8 $17-11/16 $0.225 All stock market prices and dividends have been restated to reflect the two-for-one split of the Company's common stock effective as of August 15, 1997.
The Company's common stock is traded on the New York Stock Exchange under the symbol PVA. Prior to September 1997, the Company's common stock was traded on the NASDAQ under the symbol PVIR. ITEM 6 - SELECTED FINANCIAL DATA Five Year Selected Financial Data - ---------------------------------
Year Ended December 31, 1997 1996 1995 1994 -------- ------- ------- ------- (in thousands except per share data) Revenues $ 41,404 $ 34,133 $ 38,890 $ 33,711 Operating income 18,719 13,212 5,855 10,712 Net income $1 6,018 $ 13,040 $ 10,084 $1 3,501 Per common share: Net income, basic (b) $ 1.93 $ 1.51 $ 1.18 $ 1.58 Net income, diluted (b) 1.88 1.50 1.18 1.58 Dividends paid $ 0.90 $ 0.90 $ 0.90 $ 1.00 Weighted average shares outstanding 8,302 8,694 8,538 8,560 Total assets $247,230 $229,514 $206,001 $199,259 Long-term debt $ 31,903 $ 21,233 $ 12,700 $ 9 ,250 Stockholders' equity $ 63,704 $160,211 $147,357 $137,446 Year Ended December 31, 1993 ------- (in thousands except per share data) Revenues $ 31,810 Operating income 5,433 Net income $ 10,252 Per common share: Net income, basic $ 1.20 Net income, diluted 1.20 Dividends paid $ 1.45 Weighted average shares outstanding 8,560 Total assets $214,259 Long-term debt $ 16,575 Stockholders' equity $137,777 All weighted average share and per share data have been restated to reflect the two-for-one split of the Company's common stock. Earnings per share data have been restated for all periods presented to give effect for the adoption of Statement of Financial Accounting Standards No. 128 "Earnings Per Share."
SUMMARIZED QUARTERLY FINANCIAL DATA Quarterly financial data for 1997 and 1996 were as follows:
1997 -------------------------------------------- Quarters Ended (in thousands except per share data) Mar.31 June 30 Sept.30 Dec. 31 -------------------------------------------- Revenues $ 10,250 $ 9,413 $ 8,754 $ 12,987 Operating income 5,470 3,786 3,564 5,899 Net income $ 4,726 $ 3,145 $ 3,089 $ 5,058 Net income per share, basic $ 0.55 $ 0.38 $ 0.36 $ 0.61 Net income per share, diluted $ 0.55 $ 0.37 $ 0.35 $ 0.59 Weighted average shares outstanding 8,620 8,270 8,274 8,274 1996 --------------------------------------------- Quarters Ended (in thousands except per share data) Mar. 31 June 30 Sept. 30 Dec. 31 --------------------------------------------- Revenues $ 8,890 $ 7,814 $ 7,514 $ 9,915 Operating income 4,112 2,893 2,341 3,866 Net income $ 4,257 $ 2,537 $ 2,696 $ 3,550 Net income per share, basic $ 0.50 $ 0.29 $ 0.31 $ 0.41 Net income per share, diluted $ 0.50 $ 0.29 $ 0.31 $ 0.40 Weighted average shares outstanding 8,530 8,592 8,682 8,742 All weighted average share and per share data have been restated to reflect the two-for-one split of the Company's common stock. The sum of the quarters may not equal the total of the respective years net income per share due to changes in the weighted average shares outstanding throughout the year. Earnings per share data have been restated for all periods presented to give effect for the adoption of Statement of Financial Accounting Standards No. 128 "Earnings Per Share."
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations - -------------------------------------------------------------------------- The following review of operations and financial condition of Penn Virginia Corporation and subsidiaries should be read in conjunction with the Consolidated Financial Statements and Notes thereto. Overview Penn Virginia and its subsidiaries completed several important achievements in 1997 which are expected to provide a platform for future growth and continued strong financial performance. The Company experienced three significant stock related events. In January 1997, the largest stockholder of Penn Virginia common stock sold its 20 percent position. Purchasers included a variety of financial institutions and mutual funds as well as certain of the Company's Board of Directors, senior management, and the Company itself. In July 1997, Penn Virginia declared a two-for-one stock split for holders of common stock. The Company doubled its authorized shares of common stock from 8 million to 16 million. This increase was approved by the stockholders at the annual meeting in May 1997. Finally, on September 11, 1997 the Company listed its common stock on the New York Stock Exchange. Financially, Penn Virginia achieved operating income of $18.7 million, the highest in Company history, representing a 42 percent increase over 1996. Net income of $16.0 million was also a new Company high, increasing 23 percent over 1996. In 1997, the Company completed the most aggressive oil and natural gas drilling program in Company history by drilling 90 gross (62 net) wells resulting in the addition of 17.9 Bcfe of proved reserves, replacing 224 percent of 1997 production. Penn Virginia also achieved the highest production level in company history of 8.0 Bcfe. Penn Virginia is dedicated to the financial discipline and strategy necessary to focus primarily on drilling when natural gas prices are high and acquisition of reserves when natural gas prices are low. In 1997, the Company re-leased portions of the approximately 220 million tons of coal reserves that had been regained in 1996. As a result, twelve new lessees brought diversification to a property that had previously been controlled by one lessee. In January 1997, the Company acquired a property in Virginia consisting of 6,500 acres and the mining rights to an additional 13,100 acres. The property contains an estimated 10.5 million recoverable tons of high quality metallurgical and steam coal. In February 1997, Penn Virginia acquired approximately 7.5 million tons of recoverable coal reserves on approximately 4,700 acres adjacent to the Company's Kentucky properties. The coal is high quality, low sulfur coal suitable for the steam market. Production from the property is anticipated to begin in 1998. Coal production and the resulting royalty income increased 60 percent and 66 percent respectively over 1996 and 1995 levels. Also, revenue from the sale of timber reached a Company record level of $1.8 million. In January 1998, Penn Virginia opened a satellite office in Charleston, West Virginia with the primary objective of identifying and developing both oil and gas and coal reserve opportunities. Goals and Strategy Penn Virginia's primary goal is to increase shareholder wealth. The Company intends to grow but only if such growth results in adding real economic value. The Company believes growth in economic value will ultimately be reflected in the price of its stock. The components of a value-added strategy include growth, margin management, value enhancement, and divestiture. Penn Virginia intends to increase reserves, production, and value over a commodity price cycle. Managing margins includes mitigating the low points of a price cycle through hedging and an aggressive management of costs primarily through an emphasis on improvements in productivity. At Penn Virginia, value enhancement activities include pursuing competitive advantages that increase the value of existing assets and improve the opportunities to make successful acquisitions. Finally, selective divestiture of declining or non-strategic assets and redeployment of the capital resources is an important part of the Company's management of its long-term asset portfolio. Penn Virginia's long-term oil and gas strategy is to add to its base of proved reserves through a combination of low-risk development drilling, moderate-risk exploratory drilling and property acquisitions. The Company targets acquisition candidates with significant development and exploration opportunities and/or the potential to consolidate operations, reduce operating costs per unit of production, and accelerate cash flow. Penn Virginia's coal and land strategy is to maximize coal production from its properties for the long term by leasing reserves to a diversified mix of quality operators. Timber production is coordinated to facilitate coal mining activities. An active coal and land asset acquisition program is underway. Penn Virginia's investment in Norfolk Southern Corporation is considered an important financial asset but not a strategic asset. Results of Operations - --------------------- Consolidated Net Income Penn Virginia's 1997 net income was $16.0 million compared with $13.0 million in 1996 and $10.1 million in 1995. Income before income taxes includes a gain of approximately $2.0 million on the sale of non-strategic oil and gas properties in November 1997. Income before income taxes in 1996 includes a $3.3 million loss on the Company's investment in Westmoreland Coal Company common stock and $0.6 million gain for the settlement of the abrogation of natural gas sales contracts by Columbia Energy Company. Net income for 1995 includes $11.4 million for the settlement of the abrogation of natural gas sales contracts by Columbia Gas, a $6.4 million gain on the sale of 100,000 shares of Norfolk Southern Corporation common stock, a $10.9 million charge on certain of the Company's proved oil and gas properties related primarily to the adoption of Statement of Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS No. 121) and a $1.5 million loss related to the sale of nonstrategic oil and gas properties.
Selected Financial Data 1997 1996 1995 --------------------------- (in millions except as noted) Revenues $41.4 $34.1 $38.9 Operating costs and expenses 22.7 20.9 33.0 Operating income 18.7 13.2 5.9 Net income 16.0 13.0 10.1 Earnings per share, basic 1.93 1.51 1.18 Earnings per share, diluted 1.88 1.50 1.18
Oil and Gas - ----------- The oil and gas segment explores for, develops and produces crude oil and natural gas in western Virginia, southern West Virginia and eastern Kentucky. The Company also owns mineral rights to oil and gas reserves. Selected Financial and Operating Data
1997 1996 1995 --------------------------- (in millions except as noted) Revenues Oil and condensate $ 0.7 $ 0.9 $ 0.8 Natural gas sales 20.2 19.3 12.3 Royalty income 1.6 1.8 1.1 Gain on the sale of property 1.9 - 0.2 Natural gas contract settlement - 0.6 11.4 Other 0.5 0.5 0.4 ----- ----- ----- Total Revenues $24.9 $23.1 $26.2 Expenses Lease operating expenses $ 3.4 $ 3.1 $ 3.0 Exploration expenses 1.4 0.4 0.4 Taxes other than income 2.1 2.0 1.3 Loss on the sale of property - - 1.8 General and administrative 2.7 2.7 3.1 ----- ----- ----- Operating Expenses 9.6 8.2 9.6 Depreciation, depletion and amortization 5.9 6.6 7.6 Impairment of properties - - 10.9 ----- ----- ----- Total Expenses $15.5 $14.8 $28.1 ----- ----- ----- Operating Income (Loss) $ 9.4 $ 8.3 $(1.9) Production Oil and condensate (MBbls) 38 47 58 Natural gas (Bcf) 7.2 6.8 6.6 Royalty natural gas (Bcf) 0.6 0.7 0.6 Prices Oil and condensate ($/Bbl) $17.39 $18.43 $14.24 Natural gas ($/Mcf) 2.81 2.84 1.86 Royalty natural gas ($/Mcf) 2.89 2.66 1.96 Hedging Summary Natural gas prices ($/Mcf): Actual price received for production $ 2.87 $ 2.82 $ 1.86 Effect of hedging activities (0.06) - - ------- ------- ------ Average price $ 2.81 $ 2.82 $ 1.86
The oil and gas segment had an operating income of $9.4 million in 1997 compared with $8.3 million in 1996 and an operating loss of $1.9 million in 1995. Revenues for 1997 were slightly higher compared with 1996 resulting from a gain on the sale of oil and gas property in 1997. Revenues for 1996 included the recognition of income associated with the settlement of a contract dispute with the Columbia Energy Company in 1996. Oil prices declined from $18.43 in 1996 to $17.39 in 1997. The Company received an average of $2.84 per Mcf for its working interest gas in 1996 compared with $2.81 per Mcf in 1997. The Company will, when circumstances warrant, hedge the price received for market-sensitive production through the use of swaps with purchased options. Gains and losses from hedging activities are included in natural gas revenues when the hedged production occurs. In 1997, the Company recognized losses of $0.5 million on hedging activities. The Company had no comparable hedging activities in 1996 and 1995. Operating expenses increased 17 percent in 1997 to $9.6 million compared with $8.2 million in 1996 and $9.6 million in 1995. Exploration expenses were the primary factor in this 1997 increase when compared to 1996 due to dry hole costs for five exploratory wells in 1997. Expenses decreased $13.3 million in 1996 compared with 1995, primarily as a result of the adoption of SFAS No. 121 in 1995 and a loss on the sale of non-strategic oil and gas properties. Coal and Land - ------------- The coal and land segment includes Penn Virginia's mineral rights to coal reserves, its timber assets and its land assets. Selected Financial and Operating Data
1997 1996 1995 --------------------------- (in millions except as noted) Revenues Coal royalties $ 11.6 $ 7.0 $ 9.1 Timber 1.8 0.8 0.6 Gain on the sale of property 0.1 - 0.2 Other 0.4 0.4 - ------ ------ ------ Total Revenues $ 13.9 $ 8.2 $ 9.9 Expenses Operating costs $ 0.3 $ 0.1 $ 0.1 Exploration expenses 0.3 0.4 0.1 Taxes other than income 0.3 0.3 0.2 General and administrative 1.8 1.5 1.6 ------ ------ ------ Operating Expenses 2.7 2.3 2.0 Depreciation, depletion and amortization 0.5 0.2 0.2 ------ ------ ------ Total Expenses $ 3.2 $ 2.5 $ 2.2 ------ ------ ------ Operating Income $ 10.7 $ 5.7 $ 7.7 ------ ------ ------ Production Royalty coal tons produced (millions) 5.4 3.4 4.1 Timber sales (millions of board feet) 7.9 4.0 3.2 Prices Royalty per ton of coal produced $ 2.14 $ 2.07 $ 2.20 Timber sales price per Mbf $ 206 $ 183 $ 158
Operating income for the coal and land segment was $10.7 million in 1997 compared with $5.7 million in 1996 and $7.7 million in 1995. The increase of 88 percent from 1996 to 1997 was, in part, a result of new leases on the Company's Wise property (primarily the Virginia acreage formerly leased to Westmoreland Coal Company). These additional leases were signed in 1996 and early 1997 and produced an additional 935,000 tons from this property. In early 1997, the Company also acquired additional coal reserves, which provided royalties on an additional 881,000 tons in 1997. Coal royalty revenues decreased from $9.1 million in 1995 to $7.0 million in 1996 which was related to the cessation of mining on a substantial portion of the Company's Wise property by Westmoreland. The Company expects coal production from its properties to increase steadily in 1998 and 1999 due to the startup of new lessees in Virginia and West Virginia. Investments - ----------- Penn Virginia's investments consist primarily of shares held in Norfolk Southern Corporation.
1997 1996 1995 ---------- ----------- -------- (in millions except as noted) Revenues-dividends $ 2.6 $ 2.8 $ 2.8 Number of common shares owned at year-end Norfolk Southern Corporation 3,307,200 1,102,400 1,102,400 Fair value at year-end ($MM) Norfolk Southern Corporation $ 100.9 $ 97.0 $ 87.5 Other - 0.4 9.1 ---------- --------- --------- $ 100.9 $ 97.4 $ 96.6 --------- --------- ---------
In the third quarter of 1997, Norfolk Southern Corporation declared a three-for-one stock split, which increased the Company's shares from 1,102,400 in 1996 to 3,307,200 in 1997. In the fourth quarter of 1996, the Company sold 598,600 shares of its Westmoreland Coal Company common stock to various purchasers. In December 1996, Westmoreland Coal Company filed for Chapter 11 bankruptcy causing Penn Virginia to write down its investment in the remaining 755,811 shares held at year-end. In the third quarter of 1996, the Company contributed 400,000 shares of its Westmoreland Coal Company common stock to the Penn Virginia Corporation Benefits Trust Fund, which is a voluntary employee beneficiary association. This fund provides part of the life and medical benefits coverage for eligible retired employees of Penn Virginia. Capital Resources and Liquidity - ------------------------------- Cash flow from Operating Activities Net cash provided from operating activities was $19.7 million in 1997 compared with $18.5 million in 1996 and $19.6 million in 1995. Cash flow from Investing Activities The Company used $15.8 million in investing activities in 1997 compared with $20.0 million in 1996 and $14.0 million in 1995. In 1997, the Company received payments on long-term coal notes of $3.5 million and $4.0 million from the sale of non-strategic oil and gas properties. Capital expenditures totaled $23.2 million in 1997 compared with $29.2 million in 1996 and $26.1 million in 1995. Development drilling expenditures for the oil and gas segment were $10.6 million in 1997 compared with $7.3 million in 1996. The Company drilled 42.0 net successful development wells, 11.0 exploratory wells and 3.0 net dry holes in 1997 compared with 37.3 net successful development wells and 1.0 net dry hole in 1996. In addition, the Company drilled 6.0 and 10.1 net exploratory wells, which were being evaluated and tested at year end 1997 and 1996, respectively. Of the 10.1 net wells under evaluation at the end of 1996, 7.1 were productive and 3.0 were expensed as dry holes in 1997. Unproved property lease acquisition costs were $0.2 million for 1997. Capital expenditures before lease and proved property acquisitions for 1998 are expected to be $16 to $18 million including $16 to $17 million for oil and gas and $0.3 million to $0.4 million for the coal and land segment. The Company plans to drill approximately 40 to 50 development wells and 20 to 25 exploratory wells. Management continually reviews the Company's drilling expenditures and may increase, decrease or reallocate amounts based on industry conditions. The acquisition of the Buchanan properties in January 1997 included approximately 10.5 million tons of recoverable coal on 6,500 acres with an additional 13,100 acres available through leases for approximately $7.0 million. In February 1997, the Company acquired an additional 7.5 million tons of recoverable coal on approximately 4,700 acres for approximately $1.9 million. Management believes its cash flow from operations, portfolio of investments and sources of debt financing are sufficient to fund its 1998 planned capital expenditure program. Cash flow from Financing Activities Net cash provided (used in) financing activities was $(5.0) million compared with $0.4 million in 1996 and ($9.8) million in 1995. In 1997, the Company purchased 420,618 (post-split) shares of treasury stock for approximately $8.7 million when Interkohle Beteiligungsgesellshaft mbH (VEBA) sold its approximate 20 percent holding in Penn Virginia's outstanding common stock. Working Capital Penn Virginia had additional debt capacity of approximately $41.0 million at year end under a committed revolving credit facility with a group of major U.S. banks. Management believes its portfolio of investments and sources of funding are sufficient to meet short- and long-term liquidity needs not funded by cash flows from operations. Year 2000 - --------- The Company is currently evaluating its information technology infrastructure for the Year 2000 compliance. The Company does not expect the cost to modify its information technology infrastructure for Year 2000 compliance will be material to its financial condition or results of operations. The Company does not anticipate any material disruption in its operations as a result of any failure by the Company to be in compliance. The Company expects to be in compliance with all Year 2000 issues. Change in Accounting Principles - ------------------------------- In the fourth quarter of 1997, the Company adopted Financial Accounting Standards Board Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share" which establishes new standards for computing and presenting earnings per share. SFAS No. 128 requires the presentation of basic and diluted earnings per share for each period presented. Earnings per share have been restated for all periods presented to give effect for the adoption of SFAS No. 128. Environmental Matters - --------------------- Penn Virginia's operating segments are subject to various environmental hazards. Several federal, state and local laws, regulations and rules govern the environmental aspects of the Company's business. Noncompliance with these laws, regulations and rules can result in substantial penalties or other liabilities. The Company does not believe its environmental risks are materially different from those of comparable companies or that cost of compliance will have a material adverse effect on profitability, capital expenditures or competitive position. There is no assurance that changes in or additions to laws, regulations or rules regarding the protection of the environment will not have such an impact. The Company believes it is materially in compliance with environmental laws, regulations and rules. As of December 31, 1997, the Company has provided for approximately $15,000 to complete the remediation of a previously owned site. In conjunction with the leasing of property to coal operators, all environmental and reclamation liabilities are the responsibility of the lessees. However, if the lessee is not financially capable of fulfilling those obligations, there is a possibility that the appropriate authorities would attempt to assign those liabilities to the landowner. The Company would vigorously contest such an assignment. Forward-Looking Statements - -------------------------- Statements included in this report which are not historical facts (including any statements concerning plans and objectives of management for future operations or economic performance, or assumptions related thereto) are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. In addition, Penn Virginia and its representatives may from time to time make other oral or written statements which are also forward-looking statements. Such forward-looking statements include, among other things, statements regarding development activities, capital expenditures, acquisitions and dispositions, drilling and exploration programs, expected commencement dates of coal mining or oil and gas production, projected quantities of future oil and gas production by Penn Virginia, projected quantities of future coal production by the Company's lessees producing coal from reserves leased from Penn Virginia, costs and expenditures as well as projected demand or supply for coal and oil and gas, which will affect sales levels, prices and royalties realized by Penn Virginia. These forward-looking statements are made based upon management's current plans, expectations, estimates, assumptions and beliefs concerning future events impacting Penn Virginia and therefore involve a number of risks and uncertainties. Penn Virginia cautions that forward-looking statements are not guarantees and that actual results could differ materially from those expressed or implied in the forward-looking statements. Important factors that could cause the actual results of operations or financial condition of Penn Virginia to differ include, but are not necessarily limited to: the cost of finding and successfully developing oil and gas reserves; the cost of finding new coal reserves; the ability to acquire new oil and gas and coal reserves on satisfactory terms; the price for which such reserves can be sold; the volatility of commodity prices for oil and gas and coal; the risks associated with having or not having price risk management programs; Penn Virginia's ability to lease new and existing coal reserves; the ability of Penn Virginia's lessees to produce sufficient quantities of coal on an economic basis from Penn Virginia's reserves; the ability of lessees to obtain favorable contracts for coal produced from Penn Virginia reserves; Penn Virginia's ability to obtain adequate pipeline transportation capacity for its oil and gas production; competition among producers in the coal and oil and gas industries generally and in the Appalachian Basin in particular; the extent to which the amount and quality of actual production differs from estimated recoverable coal reserves and proved oil and gas reserves; unanticipated geological problems; availability of required materials and equipment; the occurrence of unusual weather or operating conditions including force majeure or events; the failure of equipment or processes to operate in accordance with specifications or expectations; delays in anticipated start-up dates; environmental risks affecting the drilling and producing of oil and gas wells or the mining of coal reserves; the timing of receipt of necessary governmental permits; labor relations and costs; accidents; changes in governmental regulation or enforcement practices, especially with respect to environmental, health and safety matters, including with respect to emissions levels applicable to coal-burning power generators; risks and uncertainties relating to general domestic and international economic (including inflation and interest rates) and political conditions; the experience and financial condition of lessees of coal reserves, joint venture partners and purchasers of reserves in transactions financed by Penn Virginia, including their ability to satisfy their royalty, environmental, reclamation and other obligations to Penn Virginia and others; changes in financial market conditions; changes in the market prices or value of the marketable securities owned by Penn Virginia, including the price of Norfolk Southern common stock and other risk factors detailed in Penn Virginia's Securities and Exchange commission filings. Many of such factors are beyond Penn Virginia's ability to control or predict. Readers are cautioned not to put undue reliance on forward-looking statements. While Penn Virginia periodically reassesses material trends and uncertainties affecting Penn Virginia's results of operations and financial condition in connection with the preparation of Management's Discussion and Analysis of Results of Operations and Financial Condition and certain other sections contained in Penn Virginia's quarterly, annual or other reports filed with the Securities and Exchange Commission, Penn Virginia does not intend to publicly review or update any particular forward-looking statement, whether as a result of new information, future events or otherwise. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PENN VIRGINIA CORPORATION March 25, 1998 By: /S/ STEVEN W. THOLEN ----------------------------- (Steven W. Tholen, Vice President and Chief Financial Officer) March 25, 1998 By: /S/ ANN N. HORTON --------------------------- (Ann N. Horton, Controller and Principal Accounting Officer) Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. /S/ LENNOX K. BLACK Chairman of the Board March 25, 1998 - ----------------------- and Director (Lennox K. Black) /S/ RICHARD A. BACHMANN Director March 25, 1998 - ----------------------- (Richard A. Bachmann) /S/ JOHN D. CADIGAN Director March 25, 1998 - ----------------------- (John D. Cadigan) /S/ A. JAMES DEARLOVE Director and March 25, 1998 - ----------------------- Chief Executive Officer (A. James Dearlove) Director - ----------------------- (Robert Garrett) /S/ JOE T. RYE Director March 25, 1998 - ----------------------- (Joe T. Rye) /S/ JOHN A. H. SHOBER Director March 25, 1998 - ----------------------- (John A. H. Shober) /S/ FREDERICK C. WITSELL, JR Director March 25, 1998 - ---------------------------- (Frederick C. Witsell, Jr.) ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Penn Virginia Corporation and Subsidiaries Index to Financial Section Reports of Independent Public Accountants................26 Management's Report on Financial Information.............28 Financial Statements and Supplementary Data..............29 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Penn Virginia Corporation: We have audited the accompanying balance sheets of Penn Virginia Corporation (a Virginia corporation) and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, shareholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Penn Virginia Corporation and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. Arthur Andersen LLP Houston, Texas February 11, 1998 Independent Auditors' Report The Board of Directors and Shareholders Penn Virginia Corporation We have audited the consolidated statements of income, shareholders' equity and cash flows of Penn Virginia Corporation and subsidiaries for the year ended December 31, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the results of operations and cash flow of Penn Virginia Corporation and subsidiaries for the year ended December 31, 1995, in conformity with generally accepted accounting principles. As discussed in the Summary of Significant Accounting Policies, in December 1995 the Company adopted the provisions of the Financial Accounting Standard Board's Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". KPMG PEAT MARWICK LLP Philadelphia, Pennsylvania February 21, 1996 Management's Report on Financial Information - -------------------------------------------- Management of Penn Virginia Corporation is responsible for the preparation and integrity of the financial information included in this annual report. The financial statements have been prepared in accordance with generally accepted accounting principles, which involve the use of estimates and judgments where appropriate. The corporation has a system of internal accounting controls designed to provide reasonable assurance that assets are safeguarded against loss or unauthorized use and to produce the records necessary for the preparation of financial information. The system of internal control is supported by the selection and training of qualified personnel, the delegation of management authority and responsibility, and dissemination of policies and procedures. There are limits inherent in all systems of internal control based on the recognition that the costs of such systems should be related to the benefits to be derived. We believe the corporation's systems provide this appropriate balance. The corporation's independent public accountants, Arthur Andersen LLP, have developed an understanding of our accounting and financial controls and have conducted such tests as they consider necessary to support their opinion on the financial statements. Their report contains an independent, informed judgment as to the corporation's reported results of operations and financial position. The Board of Directors pursues its oversight role for the financial statements through the Audit Committee, which consists solely of outside directors. The Audit Committee meets regularly with management, the internal auditor and Arthur Andersen LLP, jointly and separately, to review management's process of implementation and maintenance of internal controls, and auditing and financial reporting matters. The independent and internal auditors have unrestricted access to the Audit Committee. A. James Dearlove Steven W. Tholen President and Vice President and Chief Executive Officer Chief Financial Officer PENN VIRGINIA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31, 1997 1996 1995 -------- ------- -------- (in thousands except share data) Revenues Oil and condensate $ 661 $ 866 $ 824 Natural gas 20,179 19,347 12,263 Natural gas royalties 1,648 1,776 1,073 Coal royalties 11,617 7,009 9,131 Timber 1,765 810 555 Dividends 2,646 2,750 2,803 Gain on the sale of property 1,983 29 362 Natural gas contract settlement (Note 5) 0 611 11,406 Other 905 935 473 ------- ------- ------- 41,404 34,133 38,890 Expenses Operating expenses 3,703 3,194 3,094 Exploration expenses 1,753 805 469 Taxes other than income 2,431 2,443 1,732 General and administrative 8,240 7,637 7,238 Loss on the sale of property 9 11 1,852 Impairment of oil and gas properties 0 0 10,927 Depreciation, depletion and amortization 6,549 6,831 7,723 ------- ------- ------- 22,685 20,921 33,035 Operating income 18,719 13,212 5,855 Other (income) expense: Interest expense 2,317 1,389 1,964 Interest income (3,534) (3,957) (759) Impairment of investment 0 1,917 0 (Gain) loss on sale of securities (50) 1,405 (6,391) Other (301) (1,633) (803) ------- ------- ------ Income from operations before income taxes 20,287 14,091 11,844 Income tax expense 4,269 1,051 1,760 ------- ------- ------- Net Income $16,018 $13,040 $10,084 ------- ------- ------- Net income per share, basic $ 1.93 $ 1.51 $ 1.18 Net income per share, diluted $ 1.88 $ 1.50 $ 1.18 Weighted average shares outstanding 8,302 8,634 8,538 The accompanying notes are an integral part of these consolidated financial statements.
PENN VIRGINIA CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, 1997 1996 --------- --------- (in thousands except share data) Assets Current assets Cash and cash equivalents $ 831 $ 1,893 Accounts receivable 7,404 4,856 Recoverable income taxes 0 871 Current portion of long-term notes receivable 2,414 1,512 Inventories 233 218 Current deferred income taxes 696 776 Other 311 210 --------- -------- Total current assets $ 11,889 $ 10,336 Investments (Note 3) 100,885 97,368 Long-term notes receivable (Note 4) 4,195 5,720 Oil and gas properties, wells and equipment, using the successful efforts method of accounting 148,487 138,184 Other property, plant and equipment 42,626 33,218 Less: Accumulated depreciation, depletion and amortization 61,677 56,110 -------- -------- Total property, plant and equipment (Note 6) 129,436 115,292 Other assets 825 798 -------- -------- Total assets $247,230 $229,514 -------- -------- Liabilities and Shareholders' Equity Current liabilities Current installments on long-term debt (Note 7) $ 2,025 $ 2,025 Accounts payable 1,828 1,812 Accrued expenses 5,885 5,543 Deferred income 279 279 Taxes on income 144 8 -------- -------- Total current liabilities 10,161 9,667 Other liabilities (Note 12) 4,822 5,544 Deferred income taxes 36,640 32,859 Long-term debt (Note 7) 31,903 21,233 -------- -------- Total liabilities 83,526 69,303 Commitments and contingencies Shareholders' equity Preferred stock of $100 par value - Authorized 100,000 shares; issued none 0 0 Common stock of $6.25 par value - Authorized 16,000,000 shares; issued 8,901,434 shares in 1997 and 4,450,717 (pre-split) shares in 1996 55,634 27,817 Other paid-in-capital 8,431 36,138 Retained earnings 51,813 43,240 ------- ------- 115,878 107,195 Add: Net unrealized holding gain - investments 63,728 61,215 Less: 627,108 shares in 1997 and 218,954 (pre-split) in 1996 of common stock held in treasury, at cost 14,024 5,575 Unearned compensation - ESOP 1,650 1,850 Pension liability 228 774 -------- -------- Total shareholders' equity 163,704 160,211 -------- -------- Total liabilities and shareholders' equity $247,230 $229,514 -------- -------- The accompanying notes are an integral part of these consolidated financial statements.
PENN VIRGINIA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Shares Common Outstanding Stock ----------- ---------- Balance at December 31, 1994 4,279,540 $ 27,734 Net income - - Dividends paid Additional liability for pension plan - - Reversal of additional liability for for pension plan - - Reversal of special dividend paid on unallocated shares in employee stock - - Unrealized holding gain adjustment - - Purchase of 17,300 shares of treasury stock (17,300) - Contribution to ESOP - - ---------- ----------- Balance at December 31, 1995 4,262,240 $ 27,734 Net income - - Dividends paid - - Additional liability for pension plan - - Contribution to ESOP 58,824 - Exercise of stock options 20,176 83 Unrealized holding gain adjustment - - Allocation of ESOP shares - - ---------- ----------- Balance at December 31, 1996 4,341,240 $ 27,817 Net income - - Two for one common stock split 4,341,240 27,817 Dividends paid - - Additional liability for pension plan - - Exercise of stock options 12,464 - Unrealized holding gain adjustment - - Purchase of 420,618 (post-split) shares of treasury stock (420,618) - Allocation of ESOP shares - - -------- -------- Balance at December 31, 1997 8,274,326 $55,634 Other Paid-in Retained Capital Earnings --------- --------- Balance at December 31, 1994 $ 34,793 $ 35,571 Net income - 10,084 Dividends paid - (7,677) Additional liability for pension plan 899 Reversal of additional liability for for pension plan 166 - Reversal of special dividend paid on unallocated shares in employee stock - - Unrealized holding gain adjustment - - Purchase of 17,300 shares of treasury stock - - Contribution to ESOP - - -------- -------- Balance at December 31, 1995 $ 35,858 $ 37,978 Net income - 13,040 Dividends paid - (7,778) Additional liability for pension plan - - Contribution to ESOP - - Exercise of stock options 266 - Unrealized holding gain adjustment - - Allocation of ESOP shares 14 - -------- -------- Balance at December 31, 1996 $ 36,138 $ 43,240 Net income - 16,018 Two for one common stock split (27,817) - Dividends paid - (7,445) Additional liability for pension plan - - Exercise of stock options 9 - Unrealized holding gain adjustment - - Purchase of 420,618 (post-split) shares of treasury stock - - Allocation of ESOP shares 101 - -------- -------- Balance at December 31, 1997 $ 8,431 $ 51,813 Net Unrealized Holding Gain- Treasury Investments Stock --------------- ---------- Balance at December 31, 1994 $ 47,083 $ (7,435) Net income - - Dividends paid - - Additional liability for pension plan - - Reversal of additional liability for for pension plan - - Reversal of special dividend paid on unallocated shares in employee stock - 21 Unrealized holding gain adjustment 7,531 - Purchase of 17,300 shares of treasury stock - (514) Contribution to ESOP - - ------- ------- Balance at December 31, 1995 $54,614 $(7,928) Net income - - Dividends paid - - Additional liability for pension plan - - Contribution to ESOP - 2,661 Exercise of stock options - (308) Unrealized holding gain adjustment 6,601 - Allocation of ESOP shares - - ------- -------- Balance at December 31, 1996 $61,215 $(5,575) Net income - - Two for one common stock split - - Dividends paid - - Additional liability for pension plan - - Exercise of stock options - 279 Unrealized holding gain adjustment 2,513 - Purchase of 420,618 (post-split) shares of treasury stock - (8,728) Allocation of ESOP shares - - ------- -------- Balance at December 31, 1997 $63,728 $(14,024) Unearned Guaranteed Compensation Dept to ESOP ESOP --------------- ---------- Balance at December 31, 1994 $ (300) $ - Net income - - Dividends paid - - Additional liability for pension plan - - Reversal of additional liability for for pension plan - - Reversal of special dividend paid on unallocated shares in employee stock - Unrealized holding gain adjustment - - Purchase of 17,300 shares of treasury stock - - Contribution to ESOP 300 - ------- ------- Balance at December 31, 1995 $ - $ - Net income - - Dividends paid - - Additional liability for pension plan - - Contribution to ESOP - (2,000) Exercise of stock options - - Unrealized holding gain adjustment - - Allocation of ESOP shares - 150 ------- -------- Balance at December 31, 1996 $ - $(1,850) Net income - - Two for one common stock split - - Dividends paid - - Additional liability for pension plan - - Exercise of stock options - - Unrealized holding gain adjustment - - Purchase of 420,618 (post-split) shares of treasury stock - - Allocation of ESOP shares - 200 ------- -------- Balance at December 31, 1997 0 $(1,650) Pension Total Stockholders' Liability Equity ----------- ------------------- Balance at December 31, 1994 - $ 137,446 Net income - 10,084 Dividends paid - (7,677) Additional liability for pension plan (899) - Reversal of additional liability for for pension plan - 166 Reversal of special dividend paid on unallocated shares in employee stock - 21 Unrealized holding gain adjustment - 7,531 Purchase of 17,300 shares of treasury stock - (514) Contribution to ESOP - 300 ---------- ----------- Balance at December 31, 1995 $ (899) $ 147,357 Net income - 13,040 Dividends paid - (7,778) Additional liability for pension plan 125 125 Contribution to ESOP - 661 Exercise of stock options - 41 Unrealized holding gain adjustment - 6,601 Allocation of ESOP shares - 164 ---------- ----------- Balance at December 31, 1996 (774) $ 160,211 Net income - 16,018 Two for one common stock split - - Dividends paid - (7,445) Additional liability for pension plan 546 546 Exercise of stock options - 288 Unrealized holding gain adjustment - 2,513 Purchase of 420,618 (post-split) shares of treasury stock - (8,728) Allocation of ESOP shares - 301 -------- -------- Balance at December 31, 1997 $ (228) $ 163,704 The accompanying notes are an integral part of these consolidated financial statements.
PENN VIRGINIA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW
Year ended December 31, 1997 1996 1995 -------- -------- ------- (in thousands except share data) Cash flows from (used in) operating activities Net income $16,018 $13,040 $10,084 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation, depletion and amortization 6,549 6,831 7,723 Impairment of properties 0 0 10,927 Impairment of investment 0 1,917 0 (Gain) loss on the sale of securities (50) 1,405 (6,391) (Gain) loss on the sale of property, plant and equipment (1,983) (18) 1,490 Deferred income taxes 2,169 (369) (3,474) Dry hole expense 949 16 (72) Interest income (2,833) (3,957) (759) Other 175 176 1,674 -------- ------ ------- 20,994 19,041 21,202 Changes in assets and liabilities: Accounts receivable (2,548) (932) (638) Inventories (15) (31) 412 Other current assets (101) 2,188 1,877 Accounts payable and accrued expenses 358 591 (2,855) Deferred income 0 (260) (32) Taxes on income 136 (350) 358 Other assets and liabilities and investments 881 (1,765) (687) ------- ------- ------- Net cash flows from operating activities $19,705 $18,482 $19,637 Cash flows from (used in) investing activities Proceeds from the sale of securities 0 3,448 6,656 Proceeds from the sale of property, plant and equipment 3,957 190 1,146 Payments received on long-term notes receivable 3,456 5,621 5,183 Producing properties acquired (82) (250) (17,021) Lease acquisitions (9,284) (19,204) (3,254) Capital expenditures (13,826) (9,764) (5,827) Note purchases 0 0 (800) -------- ------- -------- Net cash flows used in investing Activities $(15,779) $(19,959) $(13,917) Cash flows from (used in) financing activities Dividends paid (7,445) (7,778) (7,677) Proceeds from long-term borrowings 19,513 24,128 20,400 Repayment of long-term borrowings (8,917) (16,625) (22,275) Purchases of treasury stock (8,728) 0 (514) Issuance of stock 589 652 0 Reduction in guaranteed debt of ESOP 0 0 300 ------- -------- ------ Net cash flows from (used in) financing activities $(4,988) $ 377 $(9,766) ------- ------- ------- Net decrease in cash and cash equivalents (1,062) (1,100) (4,046) Cash and cash equivalents - beginning of year 1,893 2,993 7,039 ------- ------- ------- Cash and cash equivalents - end of year $ 831 $ 1,893 $ 2,993 ------- ------- ------- Supplemental disclosures: Cash paid during the year for: Interest $ 2,243 $1,449 $ 1,978 Income taxes $ 930 $2,468 $ 3,139 The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Nature of Operations Penn Virginia Corporation ("Penn Virginia" or the "Company") is an Appalachia energy company. Penn Virginia explores for, develops and produces crude oil, condensate and natural gas in western Virginia, southern West Virginia and eastern Kentucky. The Company owns the mineral rights to recoverable coal reserves located in Virginia, West Virginia and Kentucky. The coal reserves are leased to various operators who mine and market the coal. Penn Virginia collects royalties based on the production and sale of reserves. 2. Summary of Significant Accounting Policies Consolidation - ------------- The consolidated financial statements include the accounts of Penn Virginia Corporation and all wholly-owned subsidiaries. The Company owns and operates its oil and gas properties and manages its coal reserves through various direct and indirect subsidiaries. The Company accounts for its ownership interest in oil and gas properties using the proportionate consolidation method, whereby the Company's share of assets, liabilities, revenues and expenses is included in the appropriate classification in the financial statements. Intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, all adjustments have been reflected that are necessary for a fair presentation of the consolidated financial statements. Certain amounts have been reclassified to conform to the current year's presentation. Stock Split - ----------- On July 22, 1997, the Board of Directors declared a two-for-one stock split on the Company's common stock effected in the form of a stock dividend to holders of record on August 1, 1997. All weighted average share and per share data have been restated to reflect the stock split, except where noted. New Accounting Standards - ----------------------- In the fourth quarter of 1997, the Company adopted Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share" which establishes new standards for computing and presenting earnings per share. SFAS No. 128 requires the presentation of basic and diluted earnings per share for each period presented. Earnings per share have been restated for all periods presented to give effect for the adoption of SFAS No. 128. In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income" which established standards for reporting and displaying comprehensive income and its components in the financial statements. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997. The adoption of this statement requires incremental financial statement disclosure, and thus will have no effect on the Company's financial position or results of operations. In June 1997, the FASB issued SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information" which established standards for reporting and disclosing information about operating segments of an enterprise. SFAS No. 131 is effective for fiscal years beginning after December 15, 1997. The adoption of this statement will not change the operating segments the Company currently discloses under SFAS No. 14 "Financial Reporting of Segments of a Business Enterprise." Use of Estimates - ---------------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities in the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash Equivalents - ---------------- The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Inventories - ----------- Inventories consisting primarily of tubular goods and production equipment are valued at the lower of average cost or market. Investments - ----------- Investments consist of equity securities. The Company classifies its equity securities as available-for-sale. Available-for-sale securities are recorded at fair value based upon market quotations. Unrealized holding gains and losses, net of the related tax effect, on available-for-sale securities are excluded from earnings and are reported as a separate component of stockholders' equity until realized. A decline in the market value of any available-for-sale security below cost that is deemed other than temporary, is charged to earnings in the period it occurs resulting in the establishment of a new cost basis for the security. Dividend income is recognized when earned. Realized gains and losses for securities classified as available-for- sale are included in earnings and are derived using the specific identification method for determining the cost of securities sold. Notes Receivable - ---------------- At December 31, 1997, the Company had notes receivable of $6.6 million. The notes receivable are recorded at cost, adjusted for the amortization of discounts or accretion of premium. Discounts and premiums are amortized over the life of the notes receivable using the effective interest rate method. Oil and Gas Properties - ---------------------- The Company uses the successful efforts method of accounting for its oil and gas operations. Under this method of accounting, costs to acquire mineral interests in oil and gas properties, to drill and equip development wells including development dry holes, and to drill and equip exploratory wells that find proved reserves are capitalized. Capitalized costs of producing oil and gas fields are amortized using the unit-of-production method based on estimates of proved oil and gas reserves on a field-by-field basis. Estimated costs (net of salvage value) of plugging and abandoning oil and gas wells are reported as additional depreciation, depletion and amortization expense using the units-of-production method. Oil and gas reserve quantities represent estimates only and there are numerous uncertainties inherent in the estimation process. Actual future production may be materially different from amounts estimated and such differences could materially affect future amortization of proved properties. The costs of unproved leaseholds are capitalized pending the results of exploration efforts. Unproved leaseholds costs are amortized over the average holding period of five years. In addition, unproved leasehold costs are assessed periodically, on a property-by-property basis, and a loss is recognized to the extent, if any, the cost of the property has been impaired. As unproved leaseholds are determined to be productive, the related costs are transferred to proved leaseholds. Effective December 1995, the Company adopted Statement of Financial Accounting Standards No. 121 (SFAS No.121), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of". SFAS No.121 requires an impairment loss be recognized when the carrying amount of an asset exceeds the sum of the undiscounted estimated future cash flows of the asset. Under SFAS No.121, the Company reviews the impairment of oil and gas properties and related assets on a depletable unit basis. For each depletable unit determined to be impaired, an impairment loss equal to the difference between the carrying value and the fair value of the depletable unit is recognized. Fair value, on a depletable unit basis, is estimated to be the present value of expected future net cash flows, by applying future oil and gas prices available from various third parties and Company forecasts, to estimated future production of proved oil and gas reserves over their economic lives. Exploratory costs including exploratory dry holes, annual delay rental and geological and geophysical costs are charged to expense when incurred. Other Property, Plant and Equipment - ----------------------------------- Property, plant and equipment are carried at cost and include expenditures for new facilities and for improvements which substantially increase the productive lives of existing plant and equipment. Maintenance and repair costs are expensed as incurred. Depreciation of plant and equipment is generally computed using the straight-line method over their estimated useful lives, varying from 3 years to 20 years. Coal in place is depleted at a rate based upon the cost of the mineral properties and estimated recoverable tonnage therein. When an asset is retired or sold, its cost and related accumulated depreciation are removed from the accounts. The difference between undepreciated cost and proceeds from disposition is recorded as gain or loss. Concentration of Credit Risk - ---------------------------- Substantially all of the Company's accounts receivable at December 31, 1997 result from oil and gas sales and joint interest billings to third party companies in the oil and gas industry. This concentration of customers and joint interest owners may impact the Company's overall credit risk, either positively or negatively, in that these entities may be similarly affected by changes in economic or other conditions. In determining whether or not to require collateral from a customer or joint interest owner, the Company analyzes the entity's net worth, cash flows, earnings and credit ratings. Receivables are generally not collateralized. Historical credit losses incurred by the Company on receivables have not been significant. Fair Value of Financial Instruments - ----------------------------------- The Company's financial instruments consist of cash, marketable securities, natural gas swaps, accounts receivable, notes receivables, accounts payable and long-term debt. The carrying values of cash, marketable securities, accounts receivables and payables, and long-term debt approximate fair value. The fair value of the Company's notes receivable at December 31, 1997 was approximately $5.1 million. The Company periodically enters into derivative financial instruments and fixed-price physical contracts to manage its exposure to natural gas price volatility. The derivative financial instruments, which are placed with a major financial institution the Company believes is a minimum credit risk, take the form of swaps with purchased options. These derivative financial instruments are designated as hedges and realized gains and losses from the Company's price risk management activities are recognized in natural gas revenues when the associated production occurs. The fair value of open derivative financial instruments at December 31, 1997 was determined by comparing the New York Mercantile Exchange forward prices at year-end with the appropriate location differential adjustment to the contractual prices designated in the derivative financial instruments. The Company's derivative financial instruments mature monthly through December 1999. The fair value of the Company's open derivative contracts at December 31, 1997 was approximately $(1.7) million. There were no open derivative financial instruments at December 31, 1996 and 1995. Oil and Gas Revenues - -------------------- Gas revenues generally are recorded using the entitlement method in which the Company recognized its ownership interest in natural gas production as revenue. If the Company's sales exceed its ownership share of production, the differences are recorded as deferred revenue. Natural gas balancing receivables are recorded when the Company's ownership share of production exceeds sales. As of December 31, 1997 the Company did not have any material natural gas imbalances. Royalties - --------- Coal royalty income is recognized on the basis of tons sold and the corresponding revenue from those sales. All coal leases are based on an annual minimum payment due or a percentage of the gross sales price. Oil and natural gas royalties are recorded on the basis of volume sold. Income Tax - ---------- The Company accounts for income taxes under Statement of Financial Accounting Standards No.109 ("SFAS No. 109"), Accounting for Income Taxes. SFAS No. 109 requires a company to recognize deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized in a company's financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between the financial statement carrying amounts and tax bases of assets and liabilities using enacted tax rates. 3. Investments and Other Income The cost, gross unrealized holding gains and fair value of available- for-sale securities were as follows:
Gross Unrealized Holding Fair Cost Gains Value ------------------------------- (in thousands) At December 31, 1997 Available-for-sale Norfolk Southern Corporation $ 2,839 $ 98,031 $100,870 Other 3 13 16 ------- -------- -------- $ 2,842 $ 98,044 $100,886 At December 31, 1996 Available-for-sale Norfolk Southern Corporation $ 2,839 $ 94,172 $ 97,011 Other 353 4 357 ------- -------- -------- $ 3,192 $ 94,176 $ 97,368 Related dividend income is as follows: Year Ended December 31, 1997 1996 1995 ------------------------------- (in thousands) Norfolk Southern Corporation $ 2,646 $ 2,470 $ 2,363 Other - 280 440 ------- ------- ------- $ 2,646 $ 2,750 $ 2,803
The Company owned 3,307,200 shares of Norfolk Southern Corporation stock at December 31, 1997. A three-for-one stock split was declared by Norfolk Southern Corporation in 1997. 4. Notes Receivable The Company presently has notes receivable related to two coal property transactions. The first transaction in 1986 was the sale of approximately sixty million tons of coal reserves in exchange for notes receivable with a face amount of $36.3 million, discounted at 9.5 percent for a present value of approximately $16.8 million and a maturity date of July 2005. The second transaction in 1990 was the sale of approximately 7.2 million tons of coal reserves in exchange for notes receivable with a face amount of $20.9 million, discounted at 10 percent for a present value of approximately $7.0 million with a maturity date of January 2004. The notes are being repaid based on a minimum per ton of coal mined or a percentage of gross sales price of the coal mined, whichever is greater, in addition to a fixed annual payment due on one of the notes.
Maturities of notes receivable are as follows: December 31, 1997 1996 --------- --------- (in thousands) Current $ 2,414 $ 1,512 Due after one year through five years 1,928 3,453 Due after five years through ten years 2,267 2,267 ------- ------- $ 6,609 $ 7,232
5. Natural Gas Contract Settlement The Company recorded $0.6 million in 1996 and $11.4 million in 1995 for its portion of the settlement with Columbia Energy Company related to the abrogation of various high-priced, take-or-pay natural gas sales contracts. The contracts related primarily to production from a portion of the Company's eastern Kentucky and western Virginia reserves. 6. Property, Plant and Equipment
Property, plant and equipment includes: December 31, 1997 1996 --------- --------- (in thousands) Oil and gas properties $148,487 $138,184 Other property, plant and equipment: Land 694 694 Timber 188 188 Coal properties 38,917 29,713 Other plant and equipment 2,827 2,623 -------- -------- 191,113 171,402 Less: Accumulated depreciation, depletion and amortization (61,677) (56,110) --------- --------- Net property, plant and equipment $129,436 $115,292
7. Long-Term Debt Long-term debt is summarized in the following table.
December 31, 1997 1996 --------------------- (in thousands) Revolving credit, variable rate of 6.3% at December 31, 1997 due in 2000 $31,000 $18,304 Senior notes, 8.83%, due May 10, 1998 2,000 4,000 Term loan 928 954 -------- ------- 33,928 23,258 Less: current maturities (2,025) (2,025) ------- ------- Total long-term debt $31,903 $21,233
The aggregate maturities applicable to outstanding debt at December 31, 1997 are $ 2.03 million, $ 0.03 million, $ 29.03 million, $ 0.04 million, $ 0.04 million and $ 0.733 million for 1998, 1999, 2000, 2001 and thereafter, respectively. Revolving Credit In 1996, the Company entered into an agreement with a group of major U.S. banks for a $50 million unsecured revolving credit facility (the "Revolver") with a final maturity of August 2000. During 1997, the Company increased the revolving credit facility to $75 million. The Revolver bears interest at LIBOR, CD rate or the base rate at the option of the Company plus a percentage based on the percentage of the borrowing base outstanding. The financial covenants require the Company to maintain certain levels of net worth, debt-to-capitalization and dividend limitation requirements among other restrictions. Senior Notes In May 1991, the Company issued $10 million of its 7-year 8.83% Senior Notes to an institutional investor in a private placement offering. The 8.83% Senior Notes require five equal principal payments beginning in 1994. The Company may prepay all or a portion of the indebtedness subject to a prepayment premium. The 8.83% Senior Notes contain conditions and restrictive provisions customarily found in such notes including among other things: (i) restrictions on indebtedness of the Company and its subsidiaries, (ii) restrictions on dividends and the retirement of stock and (iii) merger with a third party except under certain limited conditions. The final installment of the senior debt maturing in May 1998 is $2,000,000. Term Loan The Company had one unsecured term loan outstanding at December 31, 1997, relating to an oil and gas acquisition in 1994. The note matures on September 13, 2014 and is non-interest bearing with an imputed interest rate of 7.75 percent. At December 31, 1997, the Company was in compliance with all of its convenants. 8. Accrued Expenses Accrued expenses are summarized in the following table.
December 31, 1997 1996 -------------------------- (in thousands) Pension $ 468 $ 527 Compensation 487 317 Accrued lease 208 312 Accrued oil and gas royalties 519 541 Taxes other than income 678 731 Postretirement health care 719 523 Other 2,806 2,592 ------- ------- $ 5,885 $ 5,543
9. Income Taxes The provision for income taxes from continuing operations is comprised of the following:
Year ended December 31, 1997 1996 1995 --------- -------- -------- (in thousands) Current income taxes Federal $ 1,677 $ 1,013 $ 3,602 State 423 542 523 -------- -------- -------- Total current 2,100 1,555 4,125 Deferred income taxes Federal 2,438 (553) (2,336) State (269) 49 (29) -------- -------- ------- Total deferred 2,169 (504) (2,365) -------- -------- -------- Total income tax expense $ 4,269 $ 1,051 $ 1,760
The difference between the reported income tax expense and income tax expense computed by multiplying income from continuing operations before income taxes by the federal statutory income tax rate is as follows:
Year ended December 31, 1997 1996 1995 --------------------------------- (in thousands) Computed at federal statutory tax rate $ 7,100 $ 4,932 $ 4,145 State income taxes, net of federal income tax effect 100 384 321 Dividends received deduction (648) (674) (687) Non-conventional fuel source credit (1,510) (1,769) (1,650) Adjustment to prior year provisions (200) (1,244) - Percentage depletion (416) - (270) Contribution to funded postretirement benefit plan - (420) - Other (157) (158) (99) -------- -------- -------- Total income tax expense $ 4,269 $ 1,051 $ 1,760
Temporary differences between the financial statement carrying amounts and tax bases of assets and liabilities that give rise to significant portions of the net deferred tax liability consist of the following:
December 31, 1997 1996 --------- ------ (in thousands) Deferred tax liabilities Unrealized investment gain $ 34,316 $ 32,962 Oil and gas development costs 14,508 14,030 Other 1,478 859 -------- -------- Total deferred liabilities $ 50,302 $ 47,851 Deferred tax assets Investments due to reserves and the equity method of accounting $ - $ (1,051) Notes receivable (1,647) (1,650) Reserve for accounts receivable - (46) Other property, plant, and equipment (4,059) (4,784) Additional minimum pension liability (158) (417) Accrued expenses (1,233) (1,557) Deferred income (964) (808) Alternative minimum tax credit carryforwards (5,340) (4,608) State tax loss carryforwards (661) (427) Postretirement benefit contribution carryforward (296) (420) --------- --------- Total deferred assets (14,358) (15,768) --------- --------- Net deferred tax liability $ 35,944 $ 32,083 Deferred tax assets-current $ (696) $ (776) Deferred tax liabilities-noncurrent 36,640 32,859 -------- -------- $ 35,944 $ 32,083
As of December 31, 1997, the Company had available for federal income tax purposes, alternative minimum tax credits of approximately $5.3 million which can be carried forward indefinitely as a credit against the regular tax liability. The Company has various state tax loss carryforwards of approximately $8.3 million at December 31, 1997, which expire between the years 2009 and 2012. The Company has a carryforward of excess contributions to a funded postretirement benefit plan of approximately $0.8 million at December 31, 1997. The excess contributions can be carried forward indefinitely. 10. Pension Plans The Company and its wholly-owned subsidiaries provided a noncontributory, defined benefit pension plan and early retirement programs (the "Plans") for eligible employees. Benefits are based on the employee's average annual compensation and years of service. Pension expense amounted to $160,000, $527,000 and $457,000 in 1997, 1996 and 1995, respectively. Benefits accrued by the Company's employees under the defined benefit plan were frozen effective June 30, 1996. In connection with the freezing of such benefits the Company recognized a charge of $228,000 in 1996. The Company believes the freezing of the defined benefit plan may result in reduced future annual net periodic pension expense. Net periodic pension costs for the years 1997, 1996 and 1995 consist of the following components:
Year Ended December 31, 1997 1996 1995 -------- -------- ------ (in thousands) Service cost $ 70 $ 129 $ 103 Interest cost on projected benefit obligations 812 843 886 Actual return on plan assets (736) (973) (1,605) Net amortization and deferral 14 300 1,073 Special termination benefits - 228 - ------ ------- -------- Pension expense $ 160 $ 527 $ 457
The following sets forth the funded status of the plans: December 31, 1997 1996 --------------------------- (in thousands) Actuarial present value of benefit obligations: Vested benefits $11,436 $11,657 Nonvested benefits 38 95 -------- -------- Accumulated benefit obligations 11,474 11,752 Effect of assumed future compensation levels - - ------- ------- Projected benefit obligation 11,474 11,752 Fair value of assets held in plan (9,653) (8,179) Unrecognized cumulative net loss 195 (1,191) Unrecognized prior service cost (67) (73) Unrecognized implementation pension asset (33) (37) Additional liability recognized 451 1,301 -------- ------- Unfunded accrued pension cost $ 2,367 $ 3,573 Unfunded accrued pension cost at beginning of year $ 3,573 $ 4,230 Current year's pension expense 160 527 Additional liability recognized (850) (430) Current year's contributions $ (516) $ (754) --------- --------- Unfunded accrued pension cost at end of year $ 2,367 $ 3,573
The weighted-average discount rate used in determining the 1997 and 1996 actuarial present value of benefit obligations was 7.25 percent. The rate of increase in future compensations was 6.0 percent for 1997 and 1996. The weighted average expected long-term rate of return was 9.5 percent for 1997 and 1996. 11. Other Postretirement Benefits The Company sponsors a defined benefit postretirement plan that covers employees hired prior to January 1, 1991 who retire from active service. The plan provides medical benefits for the retirees and dependents and life insurance for the retirees. The medical coverage is noncontributory for retirees who retired prior to January 1, 1991 and may be contributory for retirees who retire after December 31, 1990. Postretirement benefit expense for 1997 and 1996 includes the following components:
Year Ended December 31, 1997 1996 --------------------------- (in thousands) Service cost $ 18 $ 32 Interest cost on accumulated postretirement benefit obligation 261 281 Actual return on plan assets (262) 769 Net amortization and deferral 273 (820) ------ ------- $ 290 $ 262
The following sets forth the funded status of the plan:
Year Ended December 31, 1997 1996 ------------------------- (in thousands) Accumulated postretirement benefit Obligation Retirees $ 3,478 $ 3,684 Fully eligible and other active plan participants 187 399 -------- -------- 3,665 4,083 Plan assets at fair value (1,615) (1,620) -------- -------- Accumulated postretirement benefit obligation in excess of plan assets 2,050 2,463 Unrecognized loss (874) (1,577) -------- -------- Unfunded accrued postretirement benefit cost $ 1,176 $ 886 Unfunded accrued postretirement benefit cost at beginning of year $ 886 $ 1,863 Current year's postretirement benefit expense 290 262 Current year's contributions - (1,239) -------- -------- Unfunded accrued postretirement benefit cost at end of year $ 1,176 $ 886
Increasing the assumed health care cost trend rate by one percentage- point in each year would increase the 1997 and 1996 accumulated postretirement benefit obligations by approximately $0.2 million and $0.2 million, respectively. The discount rates (which are based on long-term market rates) used in determining the 1997 and 1996 accumulated postretirement benefit obligations were 7.25 percent. 12. Other Liabilities Other liabilities are summarized in the following table:
December 31, 1997 1996 ----------------------- (in thousands) Postretirement health care $ 422 $ 363 Deferred income 2,121 1,586 Pension 2,062 3,046 Other 217 549 -------- -------- $ 4,822 $ 5,544
13. Earnings Per Share The following is a reconciliation of the numerators and denominators used in the calculation of basic and diluted earnings per share ("EPS") for income from continuing operations for the years ended December 31, 1997, 1996 and 1995.
1997 ------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- ----------- (In thousands except per share amounts) Basic EPS: Income from continuing operations $ 16,018 8,302 $ 1.93 Dilutive Securities: Stock options - 198 Diluted EPS: -------- ---- Income from continuing operations $ 16,018 8,500 $ 1.88 1996 ----------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount ----------- -------------- --------- (In thousands except per share amounts) Basic EPS: Income (loss) from continuing operations $ 13,040 8,634 $ 1.51 Dilutive Securities: Stock options - 60 Diluted EPS: -------- ------ Income (loss) from continuing operations $ 13,040 8,694 $ 1.50 1995 ----------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- ----------- (In thousands except per share amounts) Basic EPS: Income (loss) from continuing operations $ 10,084 8,538 $ 1.18 Dilutive Securities: Stock options - - Diluted EPS: -------- ------ Income (loss) from continuing operations $ 10,084 8,538 $ 1.18
14. Stock Option and Stock Ownership Plans Stock Option Plans On May 2, 1995, the 1994 Stock Option Plan (1994 Plan) and the 1995 Directors' Stock Option Plan (1995 Plan) were approved by the shareholders. The Company also has outstanding stock options under another stock option plan, the 1980 Incentive Stock Option Plan (1980 Plan) which has expired. Under these plans, incentive and nonqualified stock options may be granted to key employees and officers of the Company and nonqualified stock options may be granted to directors of the Company. Under the 1980 Plan, some options were granted with stock appreciation rights (SARs); however, none of the options outstanding at December 31, 1997 have SARs. Options granted under the 1980, 1994 and 1995 Plans may be exercised at any time after twelve months and prior to ten years following the grant, subject to special rules that apply in the event of death, retirement and/or termination of an optionee. The exercise price of all options granted under the Plans is at fair market value of the Company's stock on the date of the grant. Of the 1,655,100 options that were granted under the Plans, 658,600 options have been exercised, forfeited or have expired. At December 31, 1997, options totaling 996,500 remain outstanding. The Company also awarded three different grants of nonqualified stock options to individual directors. Two grants which were made in 1992, one for 40,000 options and one for 20,000 options, expired in 1996. A third grant was made in 1994 for 40,000 options. These options may be exercised any time after twelve months and prior to ten years following the date of the grant. At December 31, 1997, the 40,000 options from the individual grants remain outstanding. The following table summarizes information with respect to the common stock options awarded under the Plans and grants described above. Stock option tables for 1996 and 1995 reflect shares and weighted average exercise prices on pre-stock split basis.
1997 ------------------------------ Shares Under Weighted Avg. Options Exercise Price ------------ -------------- Outstanding, Beginning of year 397,950 $ 33.63 Effect of Stock Split 397,950 $ 16.82 Granted-Options 281,600 $ 22.10 Exercised-Options 34,000 $ 16.25 Cancelled 7,000 $ 28.50 Outstanding, End of year 1,036,500 $ 18.19 Weighted average of fair value of options granted during the year $ 7.50 1996 ------------------------------ Shares Under Weighted Avg. Options Exercise Price ------------ -------------- Outstanding, Beginning of year 251,450 $ 34.73 Effect of Stock Split - - Granted-Options 207,200 $ 33.48 Exercised-Options 20,000 $ 32.57 Cancelled 40,700 $ 40.17 Outstanding, End of year 397,950 $ 33.63 Weighted average of fair value of options granted during the year $ 10.05 1995 ------------------------------ Shares Under Weighted Avg. Options Exercise Price ------------ -------------- Outstanding, Beginning of year 93,350 $ 40.69 Effect of Stock Split - - Granted-Options 196,500 $ 32.46 Exercised-Options - $ - Cancelled 38,400 $ 37.61 Outstanding, End of year 251,450 $ 34.73 Weighted average of fair value of options granted during the year $ 9.76
The following table summarizes certain information regarding stock options outstanding at December 31, 1997:
Options Outstanding ------------------------------------------------ Range of Number Weighted Avg. Weighted Avg. Exercise Outstanding Remaining Exercise Price at 12/31/97 Contractual Life Price - ----------- ----------- ---------------- ------------- $15 to $18 724,000 7.7 $16.48 $21 to $24 299,000 5.5 $22.01 $25 to $27 13,500 5.0 $25.57 Options Exercisable ------------------------------ Range of Number Weighted Avg. Exercise Exercisable Exercise Price at 12/31/97 Price - ----------- ----------- -------------- $15 to $18 724,000 $16.48 $21 to $24 29,000 $22.47 $25 to $27 3,500 $26.13
The Company applies the intrinsic value method for reporting compensation expense pursuant to Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" to its stock-based compensation plans. Had compensation expense for the Company's stock-based compensation plans been determined in accordance with the fair value method pursuant to SFAS No. 123 "Accounting for Stock-Based Compensation", the Company's proforma net income and earnings per share for the years ended December 31, 1997 and 1996, would have been as follows:
1997 1996 1995 ------------------------------ Net Income (in thousands) $14,208 $12,032 $ 9,464 Earnings per share, basic $ 1.71 $ 1.39 $ 1.11 Earnings per share, diluted $ 1.67 $ 1.38 $ 1.11
The fair value of the options granted during 1997 is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: a) dividend yield of 3.55 percent to 4.11 percent b) expected volatility of 36.77 percent to 36.84 percent, c) risk-free interest rate of 6.20 percent to 6.69 percent and d) expected life of 10 years. The fair value of the options granted during 1996 and 1995 is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: a) dividend yield of 5.27 percent to 5.45 percent b) expected volatility of 40.21 percent to 41.17 percent, c) risk-free interest rate of 5.70 percent to 7.64 percent and d) expected life of 10 years. The effects of applying SFAS No. 123 in this proforma disclosure are not indicative of future amounts. SFAS No. 123 does not apply to awards prior to 1995. Employee Stock Ownership Plan In February 1996, the Board of Directors extended the Employees' Stock Ownership Plan ("ESOP"). All Employees with one year of service are participants. The ESOP is designed to enable employees of the Company to accumulate stock ownership. While there will be no employee contributions, participants will receive an allocation of stock which has been contributed by the Company. Compensation costs are reported when such shares are released to employees. The ESOP borrowed $2.0 million from the Company and used the proceeds to purchase treasury stock. Under the terms of the ESOP, the Company will make annual contributions over a 10-year period. At December 31, 1997, the unearned portion of the ESOP ($1.7 million) was recorded as a contra- equity account entitled "Unearned Compensation-ESOP." Shareholder Rights Plan On February 11, 1998, the Board of Directors adopted a Shareholder Rights Plan designed to prevent an acquirer from gaining control of the Company without offering a fair price to all shareholders. Each Right entitles the holder to purchase from the Company one one-thousandth of a share of Series A Junior Participating Preferred Stock, $100 par value, at a price of $100 subject to adjustment. The Rights are not exercisable or transferable apart from the common stock until ten days after a person or affiliated group has acquired fifteen percent or more, or makes a tender offer for fifteen percent or more, of the Company's common stock. Each Right will entitle the holder, under certain circumstances (such as a merger, acquisition of fifteen percent or more of common stock of the Company by the acquiring person, or sale of fifty percent or more of the Company's assets or earning power), to acquire at half the value, either common stock of the Company, a combination of cash, other property, or common stock or other securities of the Company, or common stock of the acquiring person. Any such event would also result in any rights owned beneficially by the acquiring person or its affiliates becoming null and void. The Rights expire February 11, 2008 and are redeemable at any time until ten days following the time an acquiring person acquires fifteen percent or more of the Company's common stock at $0.001 per Right. 15. Segment Information Penn Virginia's operations are classified into two business segments: Oil and Gas - crude oil and natural gas exploration, development and production. Coal and Land - the leasing of mineral rights and subsequent collection of royalties and the development and harvesting of timber.
Corporate Oil and Gas Coal and Land and Other Consolidated ----------- ------------- --------- ------------ (in thousands) December 31, 1997 Revenues $24,868 $13,891 $ 2,645 $41,404 Operating income (loss) 9,405 10,692 (1,378) 18,719 Identifiable assets 99,073 46,950 101,207 247,230 Depreciation, depletion and amortization 5,920 516 113 6,549 Capital expenditures 13,784 9,402 6 23,192
Corporate Oil and Gas Coal and Land and Other Consolidated ----------- ------------- --------- ------------ (in thousands) December 31, 1996 Revenues $23,119 $ 8,264 $ 2,750 $ 34,133 Operating income (loss) 8,332 5,754 (874) 13,212 Identifiable assets 90,657 38,696 100,161 229,514 Depreciation, depletion and amortization 6,576 196 59 6,831 Capital expenditures 10,081 19,076 61 29,218
Corporate Oil and Gas Coal and Land and Other Consolidated ----------- ------------- --------- ------------ (in thousands) December 31, 1995 Revenues $26,130 $ 9,957 $ 2,803 $38,890 Operating income (loss) (1,801) 7,768 (112) 5,855 Identifiable assets 87,837 19,604 98,560 206,001 Depreciation, depletion and amortization 7,550 136 37 7,723 Capital expenditures 22,597 3,466 39 26,102
Operating income is total revenue less operating expenses. Operating income does not include certain other income items, gain (loss) on sale of securities, unallocated general corporate expenses, interest expense and income taxes. Identifiable assets are those assets used in the Company's operations in each segment. Corporate assets are principally cash and marketable securities. 16. Commitments and Contingencies Rental Commitments Minimum rental commitments under all non-cancelable operating leases, primarily real estate, in effect at December 31, 1997 were:
Year ending December 31, - ------------------------ 1998 $ 974,659 1999 803,203 2000 198,189 2001 - 2002 and thereafter - ---------- Total minimum payments $1,976,051
Legal The Company is involved in various legal proceedings arising in the ordinary course of business. While the ultimate results of these cannot be predicted with certainty, Company management believes these claims will not have a material effect on the Company's financial position, liquidity or operations. 17. Supplementary Information on Oil and Gas Producing Activities (Unaudited) The following supplementary information regarding the oil and gas producing activities of Penn Virginia is presented in accordance with the requirements of the Securities and Exchange Commission (SEC) and the SFAS No. 69 "Disclosures about Oil and Gas Producing Activities". The amounts shown include Penn Virginia's net working and royalty interests in all of its oil and gas operations. Capitalized Costs Relating to Oil and Gas Producing Activities
Year Ended December 31, 1997 1996 1995 -------- --------- ---------- (in thousands) Proved properties $ 45,775 $ 46,744 $ 45,934 Unproved properties 1,202 1,267 1,256 Wells, equipment and facilities 99,055 87,832 78,437 Support equipment and facilities 2,455 2,341 2,209 -------- -------- -------- $148,487 $138,184 $127,836 Accumulated depreciation, depletion and amortization (56,099) (51,086) (44,573) -------- -------- -------- Net capitalized costs $ 92,388 $ 87,098 $ 83,263
Costs Incurred in Certain Oil and Gas Activities
Year Ended December 31, 1997 1996 1995 ------- -------- -------- (in thousands) Proved Property acquisition costs $ 73 $ 250 $17,021 Unproved Property acquisition costs 90 189 151 Exploration costs 3,346 2,604 376 Development costs 10,560 7,305 5,426 ------- ------- ------- Total Costs Incurred $14,069 $10,348 $22,974
Results of Operations for Oil and Gas Producing Activities The following schedule includes results solely from the production and sale of oil and gas and includes revenues from a natural gas contract settlement and charges for property impairments. It excludes general and administrative expenses and gains or losses on property dispositions. The income tax expense is calculated by applying the statutory tax rates to the revenues after deducting costs, which include depletion allowances and giving effect to permanent differences and tax credits.
Year Ended December 31, 1997 1996 1995 (in thousands) ------- ------- ------- Revenues $22,488 $21,989 $14,159 Natural gas contract settlement - 611 11,406 Production costs 5,425 5,113 4,366 Exploration costs 1,439 402 376 Depreciation, depletion and amortization 5,920 6,576 7,550 Impairment of properties - - 10,927 ------- ------- ------- 9,704 10,509 2,346 Income tax expense 2,807 981 821 ------- ------- ------- Results of operations $ 6,897 $ 9,528 $ 1,525
Oil and Gas Reserves The following schedule presents the estimated oil and gas reserves owned by Penn Virginia. This information includes Penn Virginia's royalty and net working interest share of the reserves in western Virginia, southern West Virginia and eastern Kentucky. Net proved oil and gas reserves as of December 31, 1997, were estimated by Wright and Company, Inc. of Brentwood, Tennessee. Net proved oil and gas reserves as of December 31, 1996 were estimated by the Company's engineers and were reviewed by Williamson Petroleum Consultants, Inc. (Williamson) of Houston, Texas. Net proved oil and gas reserves as of December 31, 1995 were estimated by Williamson. All reserves are located in the United States. There are many uncertainties inherent in estimating proved reserve quantities, and projecting future production rates and the timing of future development expenditures. In addition, reserve estimates of new discoveries are more imprecise than those of properties with a production history. Accordingly, these estimates are subject to change as additional information becomes available. Proved oil and gas reserves are the estimated quantities of crude oil, condensate and natural gas that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions at the end of the respective years. Proved developed oil and gas reserves are those reserves expected to be recovered through existing equipment and operating methods. Net quantities of proved reserves and proved developed reserves during the periods indicated are set forth in the tables below:
Oil and Natural Proved Developed and Condensate Gas Undeveloped Reserves: (MBbls) (MMcf) ---------- ---------- December 31, 1994 467 127,932 Revisions of previous estimates 22 888 Extensions, discoveries and other additions - 3,511 Production (58) (7,161) Purchase of reserves - 46,556 Sale of reserves in place - (1,465) ----- ------- December 31, 1995 431 170,261 Revisions of previous estimates 70 7,861 Extensions, discoveries and other additions - 4,579 Production (47) (7,483) Purchase of reserves - 230 ----- -------- December 31, 1996 454 175,448 Revisions of previous estimates 10 (10,538) Extensions, discoveries and other additions 3 17,848 Production (38) (7,755) Purchase of reserves - 304 Sale of reserves in place (5) (3,745) ------ -------- December 31, 1997 424 171,562 Proved Developed Reserves: December 31, 1995 348 86,566 December 31, 1996 390 105,113 December 31, 1997 364 110,259
The following table sets forth the standardized measure of the discounted future net cash flows attributable to the Company's proved oil and gas reserves. Future cash inflows were computed by applying year-end prices of oil and gas to the estimated future production of proved oil and gas reserves. Natural gas prices were escalated only where existing contracts contained fixed and determinable escalation clauses. Natural gas prices were also adjusted to give effect for financial hedge contracts in place at year end. Contractually provided natural gas prices in excess of estimated market clearing prices were used in computing the future cash inflows only if the Company expects to continue to receive higher prices under legally enforceable contract terms. Future prices actually received may differ from the estimates in the standardized measure. Future production and development costs represent the estimated future expenditures (based on current costs) to be incurred in developing and producing the proved reserves, assuming continuation of existing economic conditions. Future income tax expenses were computed by applying statutory income tax rates to the difference between pre-tax net cash flows relating to the Company's proved oil and gas reserves and the tax basis of proved oil and gas properties. In addition, the effects of statutory depletion in excess of tax basis, available net operating loss carryforwards and investment tax credit carryforwards were used in computing future income tax expense. The resulting annual net cash inflows were then discounted using a 10 percent annual rate.
December 31, 1997 1996 1995 (in thousands) -------- -------- --------- Future cash inflows $539,781 $666,658 $461,899 Future production costs 144,129 163,477 125,561 Future development costs 36,537 38,639 43,850 -------- -------- ------- 359,115 464,542 292,488 Future income tax expense 70,033 100,285 84,321 -------- -------- ------- Future net cash flows 289,082 364,257 208,167 10% annual discount for estimated timing of cash flows 169,987 210,966 119,933 -------- -------- ------- Standardized measure of discounted future net cash flows $119,095 $153,291 $ 88,234
Changes in Standardized Measure of Discounted Future Net Cash Flows
Year Ended December 31, 1997 1996 1995 --------- --------- --------- (in thousands) Sales of oil and gas, net of production costs $(17,063) $(16,876) $ (9,793) Net changes in prices and production costs (35,686) 59,168 29,695 Extension, discoveries and additions, net of costs 14,318 3,932 (234) Development costs incurred during the period 3,070 5,456 5,426 Revisions of previous quantity estimates (9,036) 9,412 857 Purchase of minerals-in-place 270 275 24,590 Sale of minerals-in-place (4,990) - (1,525) Accretion of discount 17,548 11,719 6,686 Net change in income taxes 701 (4,150) (19,152) Other changes (3,328) (3,879) (4,396) -------- -------- -------- Net increase (decrease) (34,196) 65,057 32,154 Beginning of year 153,291 88,234 56,080 -------- -------- -------- End of year $119,095 $153,291 $ 88,234
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Penn Virginia engaged Arthur Andersen LLP as independent public accountants for the Company following the dismissal of KPMG Peat Marwick LLP in August, 1996. The Audit Committee of the Board of Directors approved the change in independent public accountants. KPMG Peat Marwick LLP's report on the financial statements of the Company for the year ended December 31, 1995, contained no adverse opinion or disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope, or accounting principles, or as to any other matter. During the year ended December 31, 1995, and the subsequent interim period preceding the dismissal, there were no disagreements with KPMG Peat Marwick LLP on any matter of accounting principles or practices, financial statement disclosure, or accounting scope or procedure, which disagreements if not resolved to the satisfaction of KPMG Peat Marwick LLP would have caused it to make reference thereto in its report on the financial statements of the Company for such year. Additionally, no "reportable events" (as such term is defined under the applicable rules and regulations of the Securities and Exchange Commission) occurred during the year ended December 31, 1996, or the subsequent interim periods preceding KPMG Peat Marwick LLP's dismissal. PART III ITEMS 10, 11, 12 AND 13 - DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY, EXECUTIVE OFFICERS OF THE COMPANY, EXECUTIVE COMPENSATION, SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT, AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Except for information concerning executive officers of the Company included as an unnumbered item in Part 1, in accordance with General Instruction G(3), reference is hereby made to the Company's definitive proxy statement to be filed within 120 days after the end of the fiscal year covered by this report. PART IV ITEM 14 - EXHIBITS AND REPORTS ON FORM 8-K (a) Financial Statements 1. Financial Statements - The financial statements filed herewith are listed in the Index to Financial Statements on page 29 of this report. 2. All schedules are omitted because they are not required, inapplicable or the information is included in the consolidated financial statements or the notes thereto. 3. Exhibits (3.1) Amended and restated articles of incorporation of the Company will change, as further amended. (3.2) Amended bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company's current report on Form 8-K filed with the Securities and Exchange Commission on February 23, 1998. (Commission File No. 0-753)). (4.1) Rights Agreement dated as of February 11, 1998 between Penn Virginia Corporation and American Stock Transfer & Trust Company, as Agent (incorporated by reference to Exhibit 1.1 to the Company's Registration Statement on Form 8-A filed with Securities and Exchange Commission on February 20, 1998. (Commission File No. 0- 753)). (10.1) Credit Agreement dated August 21, 1996 between Penn Virginia Corporation and Texas Commerce Bank National Association, as Agent (incorporated by reference to Exhibit 4 to the Company's quarterly report on Form 10-Q filed for the quarter ended September 30, 1996 (Commission File No. 0-753)). (10.2) First Amendment to Credit Agreement dated as of May 1, 1997 between Penn Virginia Corporation and Texas Commerce Bank National Association, as Agent (incorporated by reference on Form 8-K filed on December 5,1997 (Commission File No. 0-753)). (10.3) Copies of various other long-term debt instruments and agreements of the Company are not filed pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K, and the Company agrees to furnish copies of such debt instruments and agreements to the Commission upon request. (10.4) Penn Virginia Corporation and Affiliated Companies Employees' Stock Ownership Plan, as amended (incorporated by reference to Exhibit 19 to the Company's Annual Report on Form 10-K for the year ended December 31, 1986 (Commission File No. 0-753)). (10.5) Penn Virginia Corporation 1980 Incentive Stock Option Plan (incorporated by reference to Appendix 5 of the Prospectus comprising part of the Company's Registration Statement on Form S-8 filed with the Securities and Exchange Commission on May 13, 1982 ( Registration No. 2-77500)). (10.6) Form of agreement to evidence stock options and stock appreciation rights granted under the Penn Virginia Corporation 1980 Incentive Stock Option Plan (incorporated by reference to Exhibit 15.1(b) to the Company's Registration Statements on Form S-8 filed with the Securities and Exchange Commission on May 3, 1982 (Registration No. 2-775500)). (10.7) Amendment No. 1 to Penn Virginia Corporation 1980 Incentive Stock Option Plan (incorporated by reference to Exhibit 19.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1987 (Commission File No. 0-753)). (10.8) Penn Virginia Corporation and Affiliated Companies' Employees' Retirement/Savings Plan (incorporated by reference to Exhibit 18(b) to the Company's Registration Statement on Form S-8 filed with the Securities and Exchange Commission on May 13, 1991 (Registration No. 33-40430)). (10.9) The Company has adopted a policy concerning severance benefits for certain senior officers of the Company. The description of such policy is incorporated herein by reference to the description of such policy contained in the Company's definitive Proxy Statement dated March 31, 1997. (10.10) Penn Virginia Corporation 1994 Stock Option Plan ( incorporated by reference to Annex A of the Company's definitive Proxy Statement dated March 28, 1995 (Commission File No. 0-753)). (10.11) Penn Virginia Corporation 1995 Directors' Stock Option Plan (incorporated by reference to Annex B of the Company's definitive Proxy Statement dated March 28, 1995 (Commission File No. 0-753)). (21) Subsidiaries of the Company. (23.1) Consent of KPMG Peat Marwick LLP (23.2) Consent of Arthur Andersen LLP (b) Reports on Form 8-K A current report on Form 8-K was filed December 5, 1997 regarding an amendment to the Credit Agreement dated August 21, 1996. (27) Financial Data Schedule. (Exhibit 27 is submitted as an exhibit only in the electronic format of this Annual Report on Form 10-K submitted to the Securities and Exchange Commission.) EX-21 2 EXHIBIT 21 PENN VIRGINIA CORPORATION SUBSIDIARIES OF REGISTRANT
NAME PERCENTAGES STATE Penn Virginia Coal Company 100% Virginia Penn Virginia Equities Corporation 100% Delaware Penn Virginia Oil & Gas Corporation 100% Virginia Savannah Land Company 100% Delaware
EX-23.1 3 EXHIBIT 23.1 Consent of Independent Auditors The Board of Directors Penn Virginia Corporation: We consent to incorporation by reference in the Registration Statements Nos: 2-67355, 2-77500 and 33-40430, 33-59647, and 33-59651 on Form S-8 of Penn Virginia Corporation of our report dated February 21, 1996, relating to the consolidated statements of income, shareholders' equity and cash flows of Penn Virginia Corporation and subsidiaries for the year ended December 31, 1995 for which report appears in the December 31, 1997 Annual Report on Form 10-K of Penn Virginia Corporation. Our report refers to a change in 1995 in the method of accounting for the impairment of long-lived assets to be disposed. KPMG PEAT MARWICK LLP Philadelphia, Pennsylvania March 25, 1998 EX-23.2 4 EXHIBIT 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report dated February 11, 1998, included in the Annual Report of Penn Virginia Corporation on Form 10-K for the year ended December 31, 1997, into Penn Virginia Corporation's previously filed Registration Statements Nos. 2-67355, 2-77500, 33-40430, 33-59647 and 33-59651 on Form S-8. ARTHUR ANDERSEN LLP Houston, Texas March 25, 1998 EX-27.1 5 ART. 5 FOR 4TH QUARTER 10-Q
5 1000 YEAR DEC-31-1997 DEC-31-1997 831 0 7,404 0 233 11,889 191,113 61,677 247,230 10,161 0 0 0 55,634 108,070 247,230 35,870 41,404 3,703 3,703 10,742 0 2,317 20,287 4,269 16,018 0 0 0 16,018 1.93 1.88 Earnings per share data have been restated for all periods presented to give effect for the adoption of Statement of Financial Accounting Standards No. 128 "Earnings Per Share." Basic and diluted earnings per share have been entered in place of primary and fully diluted, respectively.
EX-27.2 6 ART. 5 FDS FOR 3RD QUARTER 10-Q
5 1000 9-MOS DEC-31-1997 SEP-30-1997 1,070 0 3,551 0 235 6,996 188,936 60,731 254,429 8,051 0 0 0 55,634 112,661 254,429 25,685 28,413 2,741 2,741 7,248 0 1,682 14,007 3,047 10,960 0 0 0 10,960 1.29 1.27 Earnings per share data have been restated for all periods presented to give effect for the adoption of Statement of Financial Accounting Standards No. 128 "Earnings Per Share." Basic and diluted earnings per share have been entered in place of primary and fully diluted, respectively.
EX-27.3 7 ART. 5 FDS 2ND QUARTER 10-Q
5 1000 6-MOS DEC-31-1997 JUN-30-1997 1,412 0 3,622 0 241 7,735 184,556 59,218 249,815 8,094 0 0 0 55,634 109,547 249,815 17,706 19,660 1,740 1,740 4,787 0 1,114 10,026 2,155 7,871 0 0 0 7,871 0.93 0.92 Earnings per share data have been restated for all periods presented to give effect for the adoption of Statement of Financial Accounting Standards No. 128 "Earnings Per Share." Basic and diluted earnings per share have been entered in place of primary and fully diluted, respectively.
EX-27.4 8 ART. 5 FDS FOR 3RD QUARTER 10-Q
5 1000 3-MOS DEC-31-1997 MAR-31-1997 1,806 0 4,417 0 233 9,068 181,226 57,595 232,793 7,843 0 0 0 27,817 124,644 232,793 9,218 10,248 832 832 2,332 0 473 5,989 1,263 4,726 0 0 0 4,726 0.55 0.55 Earnings per share data have been restated for all periods presented to give effect for the adoption of Statement of Financial Accounting Standards No. 128 "Earnings Per Share." Basic and diluted earnings per share have been entered in place of primary and fully diluted, respectively.
EX-27.5 9 ART. 5 FDS 4TH QUARTER 1996 10-Q
5 1000 YEAR DEC-31-1996 DEC-31-1996 1,893 0 4,856 0 218 10,336 171,402 56,110 229,514 9,667 0 0 0 27,817 132,394 229,514 29,808 34,133 3,194 3,194 10,090 0 1,389 14,091 1,051 13,040 0 0 0 13,040 1.51 1.50 Earnings per share data have been restated for all periods presented to give effect for the adoption of Statement of Financial Accounting Standards No. 128 "Earnings Per Share." Basic and diluted earnings per share have been entered in place of primary and fully diluted, respectively.
EX-27.6 10 ART. 5 FDS FOR 3RD QUARTER 1996 10-Q
5 1000 9-MOS DEC-31-1996 SEP-30-1996 4,475 0 2,716 0 238 12,753 167,428 54,262 235,113 9,287 0 0 0 27,817 132,812 235,113 21,393 24,214 2,329 2,329 7,274 0 1,094 11,592 2,102 9,490 0 0 0 9,490 1.10 1.10 Earnings per share data have been restated for all periods presented to give effect for the adoption of Statement of Financial Accounting Standards No. 128 "Earnings Per Share." Basic and diluted earnings per share have been entered in place of primary and fully diluted, respectively.
EX-27.7 11 ART. 5 FDS FOR 3RD QUARTER 1996 10-Q
5 1000 6-MOS DEC-31-1996 JUN-30-1996 9,626 0 3,415 0 245 18,560 154,701 52,609 227,390 11,295 0 0 0 27,817 128,059 227,390 14,731 16,701 1,510 1,510 4,803 0 603 8,313 1,519 6,794 0 0 0 6,794 0.79 0.79 Earnings per share data have been restated for all periods presented to give effect for the adoption of Statement of Financial Accounting Standards No. 128 "Earnings Per Share." Basic and diluted earnings per share have been entered in place of primary and fully diluted, respectively.
EX-27.8 12 ART. 5 FDS FOR 1ST QUARTER 10-Q
5 1000 3-MOS DEC-31-1996 MAR-31-1996 4,267 0 3,844 0 187 13,658 140,448 50,993 210,922 9,716 0 0 0 27,797 126,513 210,922 7,868 8,887 726 726 2,354 0 274 4,647 390 4,257 0 0 0 4,257 0.50 0.50 Earnings per share data have been restated for all periods presented to give effect for the adoption of Statement of Financial Accounting Standards No. 128 "Earnings Per Share." Basic and diluted earnings per share have been entered in place of primary and fully diluted, respectively.
EX-27.9 13 ART. 5 FDS FOR 4TH QUARTER 1995 10-Q
5 1000 YEAR DEC-31-1995 DEC-31-1995 2,993 0 3,924 0 187 12,894 140,386 49,371 206,001 9,310 0 0 0 27,735 119,622 206,001 23,846 38,890 3,094 3,094 22,703 0 1,964 11,844 1,760 10,084 0 0 0 10,084 1.18 1.18 Earnings per share data have been restated for all periods presented to give effect for the adoption of Statement of Financial Accounting Standards No. 128 "Earnings Per Share." Basic and diluted earnings per share have been entered in place of primary and fully diluted, respectively.
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