-----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, N5Lp3LUy2d5cJGYRSG/BUBP/sr92aJX0xt4M9uRiRCUOQB5FyGjPR2N73tJiF5MP NAHaS1wWQQEWDxCKtnJXdw== 0000077159-98-000100.txt : 19980817 0000077159-98-000100.hdr.sgml : 19980817 ACCESSION NUMBER: 0000077159-98-000100 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 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-Q SEC ACT: SEC FILE NUMBER: 001-13283 FILM NUMBER: 98687740 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-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the period ended June 30, 1998 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _______________ to _______________ Commission File Number 0-753 PENN VIRGINIA CORPORATION ________________________________________________________________ (Exact name of registrant as specified in its charter) Virginia 23-1184320 _________________________________________________________________ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 100 MATSONFORD ROAD SUITE 200 RADNOR, PA 19807 _________________________________________________________________ (Address of principal executive offices) (Zip Code) (610) 687-8900 _________________________________________________________________ (Registrant's telephone number, including area code) _________________________________________________________________ (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 [ ] Number of shares of common stock of registrant outstanding at August 6, 1998: 8,921,866 PENN VIRGINIA CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except per share amounts)
Three Months Six Months Ended June 30, Ended June 30, ---------------- ----------------- 1998 1997 1998 1997 ------ ------ ------- -------- (Unaudited) (Unaudited) Revenues: Natural gas $4,667 $4,284 $ 9,658 $ 9,904 Oil and condensate 96 164 213 391 Natural gas royalties 390 342 753 862 Coal royalties 3,332 3,094 5,901 5,739 Timber 618 604 827 810 Dividends 661 661 1,323 1,323 Gain on sale of property 24 25 24 35 Other income 190 238 343 599 ------ ------ ------- ------- Total revenues $9,978 $9,412 $19,042 $19,663 Expenses: Operating expenses $ 950 $ 908 $ 1,917 $ 1,740 Exploration expenses 219 202 268 340 Taxes other than income 666 629 1,347 1,320 General and administrative 2,147 2,263 3,928 3,877 Loss on sale of property 1 0 5 3 Depreciation, depletion, amortization 1,729 1,624 3,551 3,127 ------ ------ ------- ------- Total expenses $5,712 $5,626 $11,016 $10,407 Operating Income $4,266 $3,786 $ 8,026 $ 9,256 Other (Income) Expense: Interest expense $ 510 $ 641 $ 999 $ 1,114 Gain on sale of securities (14) - (14) - Other income (654) (892) (1,470) (1,884) ------- ------ ------- ------- Income before income tax $4,424 $4,037 $ 8,511 $10,026 Income tax expense 758 892 1,693 2,155 ------ ------ ------- ------- Net Income $3,666 $3,145 $ 6,818 $ 7,871 ====== ====== ======= ======= Net Income per share, basic 0.44 0.38 0.82 0.95 ====== ====== ======= ======= Net Income per share, diluted 0.43 0.37 0.80 0.93 ====== ====== ======= ======= Weighted average shares outstanding 8,291 8,270 8,285 8,326 (in thousands) The accompanying notes are an integral part of these condensed consolidated financial statements.
1 PENN VIRGINIA CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
June 30, December 31, ---------- ------------ 1998 1997 ---------- ------------ (Unaudited) ASSETS Current assets Cash and cash equivalents $ 2,799 $ 831 Accounts receivable 3,251 7,404 Current portion of long-term notes receivable 1,076 2,414 Current deferred income taxes 696 696 Inventories 244 233 Prepaid expenses 313 311 -------- -------- Total current assets 8,379 11,889 -------- -------- Investments 98,598 100,885 Long-term notes receivable 588 4,195 Oil and gas properties; wells and equipment, using the successful efforts method of accounting 151,747 148,487 Other property, plant and equipment 45,737 42,626 Less: Accumulated depreciation, depletion and amortization (65,170) (61,677) -------- -------- Total property, plant and equipment 132,314 129,436 -------- -------- Intangible assets, net of amortization 555 537 Other assets 244 288 Total assets $240,678 $247,230 ======== ======== The accompanying notes are an integral part of these condensed consolidated financial statements.
2 PENN VIRGINIA CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
June 30, December 31, --------- ------------ 1998 1997 --------- ------------ (Unaudited) LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Current installments on long-term debt $ 25 $ 2,025 Accounts payable 1,608 1,828 Accrued expenses 4,060 6,029 Deferred liabilities 83 279 -------- ------- Total current liabilities 5,776 10,161 -------- ------- Other liabilities 3,006 4,659 Deferred income taxes 36,858 36,640 Long-term debt 28,888 31,903 ------- ------- Total liabilities 74,528 83,363 ------- ------- Commitments and contingencies - - Minority interest 155 163 ------- ------- 155 163 Shareholders' equity Preferred stock of $100 par value- authorized 100,000 shares; none issued - - Common stock of $6.25 par value- authorized 16,000,000 shares, issued 8,921,866 shares and 8,901,434 shares in 1998 and 1997, respectively 55,887 55,634 Other paid in capital 8,578 8,431 Retained earnings 54,904 51,813 -------- -------- 119,369 115,878 Less: 618,874 shares in 1998 and 627,108 in 1997 of common stock held in treasury, at cost 13,839 14,024 Pension liability 228 228 Unearned compensation - ESOP 1,550 1,650 Add: Net unrealized investment holding gain 62,243 63,728 ------- ------- Total shareholders' equity 165,995 163,704 -------- -------- Total liabilities and shareholders' equity $240,678 $247,230 ======== ======== The accompanying notes are an integral part of these condensed consolidated financial statements.
3 PENN VIRGINIA CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED CASH FLOW STATEMENTS (Dollars in thousands)
Three Months Six Months Ended June 30, Ended June 30, ---------------- ----------------- 1998 1997 1998 1997 ------- ------ ------- -------- (Unaudited) (Unaudited) Cash flow from operating activities: Net Income $ 3,666 $ 3,145 $ 6,818 $ 7,871 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion, and amortization 1,729 1,624 3,551 3,127 Gain on sale of securities (14) - (14) - Gain on sale of property, plant and equipment (23) (25) (19) (32) Deferred income taxes 1,017 - 1,017 457 Other (419) (620) (978) (1,322) Decrease in current assets 1,236 756 4,140 1,176 Increase (Decrease) in current liabilities (650) 253 (2,189) (899) (Increase) Decrease in other assets 4,272 (29) 4,228 (44) Increase (Decrease) in other liabilities (2,028) (18) (1,850) (48) Decrease in minority interest (4) (4) (8) (8) ------- ------- ------- -------- Net Cash provided by operating activities $ 8,782 $ 5,082 $14,696 $ 10,278 Cash flows from investing activities: Proceeds from the sale of securities $ 17 $ - $ 17 $ 350 Proceeds from notes 209 1,270 1,698 2,500 Proceeds from sale of fixed assets 38 43 59 69 Capital expenditures (5,588) (3,331) (6,408) (13,186) ------- --------- ------- -------- Net Cash used in investing activities $(5,324) $(2,018) $(4,634) $(10,267) Cash flows from financing activities: Dividends paid $(1,867) $(1,862) $(3,729) $ (3,721) Proceeds from long-term debt borrowings - 2,500 - 18,513 Repayment of long-term debt principal (2,225) (4,425) (5,050) (6,967) Purchase of treasury stock (50) - - (8,728) Issuance of stock 663 328 685 410 ------- ------- ------- -------- Net Cash provided by (used in)financing activities $(3,479) $(3,459) $(8,094) $ (493) -------- -------- -------- --------- Net increase (decrease) in cash and cash equivalents $ (21) $ (395) $ 1,968 $ (482) Cash and cash equivalents- beginning balance 2,820 1,806 831 1,893 ------- ------- ------- -------- Cash and cash equivalents- ending balance $ 2,799 $ 1,411 $ 2,799 $ 1,411 ======= ======= ======= ========= Supplemental disclosures of cash flow information: Cash paid to date for: Interest $ 557 $ 765 $ 1,020 $ 1,177 Income taxes 700 258 700 456 The accompanying notes are an integral part of these condensed consolidated financial statements.
4 PENN VIRGINIA CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 1998 - ----------------------------------------------------------------- (1) ACCOUNTING POLICIES The accompanying unaudited consolidated financial statements of Penn Virginia Corporation and its subsidiaries (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial reporting and SEC regulations. These statements involve the use of estimates and judgments where appropriate. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. These financial statements should be read in conjunction with the Company's consolidated financial statements and footnotes included in the Company's December 31, 1997 annual report on Form 10-K. Operating results for the six months ended June 30, 1998 are not necessarily indicative of the results that may be expected for the year ended December 31, 1998. (2) SECURITIES The cost, gross unrealized holding gains or losses and market value for available-for-sale securities at June 30, 1998 were as follows (in thousands):
Gross Unrealized Market Cost Holding Gain Value ------- ---------------- ------- Available-for-Sale: Norfolk Southern Corporation $2,839 $95,757 $98,596 Other 0 2 2 ------ ------- ------- $2,839 $95,759 $98,598
(3) 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. (4) EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share" which establishes new standards for computing and presenting earnings per share. The provisions of the statement are effective for fiscal years ending after December 15, 1997. 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 at June 30, 1998 and 1997.
Three Months Ended June 30, 1998 -------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- ---------- (In thousands except per share amounts) Basic EPS: Income from continuing operations $3,666 8,291 $0.44 Dilutive Securities: Stock options - 240 ------ ----- ----- Diluted EPS: Income from continuing operations $3,666 8,531 $0.43 Three Months Ended June 30, 1997 -------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- ---------- (In thousands except per share amounts) Basic EPS: Income from continuing operations $3,145 8,270 $0.38 Dilutive Securities: Stock options - 171 ------ ----- ----- Diluted EPS: Income from continuing operations $3,145 8,441 $0.37
5
Six Months Ended June 30, 1998 -------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- ---------- (In thousands except per share amounts) Basic EPS: Income from continuing operations $6,818 8,285 $0.82 Dilutive Securities: Stock options - 236 ------ ----- ----- Diluted EPS: Income from continuing operations $6,818 8,521 $0.80 Six Months Ended June 30, 1997 -------------------------------------- Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- ---------- (In thousands except per share amounts) Basic EPS: Income from continuing operations $7,871 8,326 $0.95 Dilutive Securities: Stock options - 162 ------ ----- ----- Diluted EPS: Income from continuing operations $7,871 8,488 $0.93
(5) COMPREHENSIVE INCOME In the first quarter of 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income," which requires the display of comprehensive income and its components in the financial statements. Comprehensive income represents all changes in equity during the reporting period, including net income and charges directly to equity, which are excluded from net income. For the six month periods ended June 30, 1998 and 1997, the components of comprehensive income are as follows:
Three Months Six Months Ended June 30, Ended June 30, ---------------- ---------------- 1998 1997 1998 1997 -------- ------- ------- ------- Net income $ 3,666 $ 3,145 $ 6,818 $ 7,871 Unrealized holding gains (losses) on available for sale securities (16,271) 11,107 (1,485) 9,136 ------- ------- ------- ------- Comprehensive income $(12,605) $14,252 $ 5,333 $17,007
(6) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". The Statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as eithe r an asset or liability measured at its fair value. The Statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. Statement No. 133 is effective for fiscal years beginning after June 15, 1999. A company may also implement the Statement as of the beginning of any fiscal quarter after issuance (that is, fiscal quarters beginning June 16, 1998 and thereafter). Statement No. 133 cannot be applied retroactively. Statement No. 133 must be applied to (a) derivative instruments and (b) certain derivative instruments embedded in hybrid contracts that were issued, acquired, or substantively modified after December 31, 1997 (and, at the Company's election, before January 1, 1998.) The Comnpany has not yet quantified the impacts of adopting Statement No. 133 on our financial statements and has not determined the timing of or method of our adoption of Statement No. 133. However, the Statement could increase volatility in earnings and other comprehensive income. (7) START-UP ACTIVITIES In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up Activities," which requires costs of start-up activities to be expensed as incurred. This statement is effective for financial statements beginning after December 15, 1998 and requires entities to expense currently capitalized costs related to start-up activities as a cumulative effect of a change in accounting principle upon adoption of this statement. The impact of this new standard is not expected to have a material impact on the Company's financial position or results of operations. 6 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations - Second quarters of 1998 and 1997 Compared. Penn Virginia reported 1998 second quarter earnings of $3.7 million or $0.43 per share (diluted) compared with $3.1 million or $0.37 per share (diluted) for the second quarter of 1997. On a consolidated basis, revenue increased $0.6 million in the second quarter of 1997. This increase was a result of an increase in coal revenues of $0.2 million and natural gas sales of $0.4 million. Results of Operations - Six months of 1998 and 1997 Compared. Penn Virginia reported 1998 six months earnings of $6.8 million or $0.80 per share (diluted) compared with $7.9 million or $0.93 per share (diluted) for the six months of 1997. On a consolidated basis, revenues were lower $0.6 million primarily as a result of lower prices received for natural gas and oil compared with 1997. Expenses on a consolidated basis were higher by $0.6 million compared with 1997. This increase was a result of higher operating costs in the oil and gas segment, an increase in general and administrative expense in the coal segment and an overall increase in depletion and depreciation. The Company operates in two business segments: oil and gas and coal. 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 coal segment includes Penn Virginia's mineral rights to coal reserves, its timber and land assets. The Company also owns mineral rights to oil and gas reserves. Selected operating and financial data by segment is presented below. Oil and Gas Operating income for the oil and gas segment was $3.3 million for the six months of 1998 compared with $4.2 million for the six months of 1997. Operational and financial data for the Company's oil and gas segment for the 1998 and 1997 three and six months ended June 30 is summarized in the following tables: 7
Operations Summary ----------------------------- Three Months Six Months Ended June 30, Ended June 30, -------------- -------------- 1998 1997 1998 1997 ------ ------ ------ ------ Production Natural gas (MMcf)-Working Interest 1,819 1,760 3,732 3,495 Natural gas (MMcf)-Royalty Interest 147 148 287 294 Oil and condensate (MBbls) 8 10 17 21 Production, MMcfe 2,014 1,968 4,121 3,915 Average Realized Prices Natural gas ($/Mcf)-Working Interest $ 2.57 $ 2.43 $ 2.59 $ 2.83 Natural gas ($/Mcf)-Royalty Interest 2.65 2.31 2.62 2.93 Oil and condensate ($/Bbl) 12.00 16.40 12.53 18.62 Average Costs (per MMcfe) Lease operating $ 0.44 $ 0.41 $ 0.44 $ 0.41 Exploration expenses 0.03 0.08 0.02 0.06 Taxes other than on income 0.26 0.29 0.26 0.31 General and administrative 0.33 0.37 0.31 0.35 Depreciation, depletion and amortization 0.77 0.74 0.78 0.72 ----- ----- ----- ----- Total costs $1.83 $1.89 $1.81 $1.85
Approximately 50 percent of the Company's 1998 working interest natural gas production was sold at market prices, with the remaining 50 percent sold under fixed-price term contracts. 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 the second quarter of 1998, the Company recognized a $0.2 million loss on hedging activities compared with a $0.1 million loss in the second quarter of 1997. Year-to-date the Company has recognized losses of $0.4 million on hedging activities compared with $0.1 million in 1997. The following table shows the effect of hedging activities on the Company's working interest natural gas prices:
Hedging Summary ----------------------------- Three Months Six Months Ended June 30, Ended June 30, -------------- -------------- 1998 1997 1998 1997 ------ ------ ------ ------ Natural gas prices ($/Mcf): Actual price received for production $ 2.68 $ 2.48 $ 2.70 $ 2.86 Effect of hedging activities (0.11) (0.05) (0.11) (0.03) ------ ------ ------ ------ Average price $ 2.57 $ 2.43 $ 2.59 $ 2.83
Financial Summary ----------------------------- Three Months Six Months Ended June 30, Ended June 30, -------------- -------------- 1998 1997 1998 1997 ------ ------ ------ ------ (Dollars in thousands) Revenues: Natural gas sales $4,667 $4,284 $ 9,658 $ 9,904 Oil and gas royalties 390 342 753 862 Oil and condensate 96 164 213 391 Other income 106 185 178 261 ------ ------ ------- ------- Total revenues $5,259 $4,975 $10,802 $11,418 ------ ------ ------- ------- Expenses: Operating expenses $ 889 $ 805 $ 1,828 $ 1,592 Exploration expenses 58 150 95 234 Taxes other than income 525 562 1,081 1,198 General and administrative 667 737 1,273 1,373 Loss on the sale of property 4 1 Depreciation and depletion 1,548 1,455 3,199 2,815 ------ ------ ------- ------- Total expenses 3,687 3,709 7,480 7,213 ------ ------ ------- ------- Operating Income $1,572 $1,266 $ 3,322 $ 4,205 ====== ====== ======= =======
8 Results of Operations - Second quarters of 1998 and 1997 Compared. Natural Gas. Natural gas sales were $4.7 million in the second quarter of 1998 compared with $4.3 million for the second quarter of 1997. The average price received by the Company for its working interest gas was $2.57 per thousand cubic feet (Mcf) compared with $2.43 per Mcf for the same period of 1997. Natural gas volumes were up approximately three percent in the second quarter of 1998 compared with the second quarter of 1997. Oil and Condensate. Oil sales decreased $68,000 (41 percent) in the second quarter of 1998 compared with the same period of 1997. Prices per barrel were lower, averaging $12.00 per barrel (Bbl) for second quarter of 1998 compared with $16.40 per Bbl for 1997. As shown on the table above, production was down approximately 20 percent in the second quarter of 1998 compared with the second quarter of 1997. Oil and Gas Royalties. Oil and gas royalties increased $48,000 (14 percent) in the second quarter of 1998 compared with the same period of 1997. This variance resulted from an increase in natural gas prices from $2.31 per Mcf in the second quarter of 1997 to $2.65 in the second quarter of 1998 with production remaining unchanged. Other Income. Other income decreased $79,000 (43 percent) in the second quarter of 1998 compared with the same period of 1997. This decrease is a result of lower gathering and compression fees received by the Company due to decreases in production. Operating Expenses. Operating expenses for the second quarter of 1998 were $889,000 compared with $805,000 for the second quarter of 1997. This increase is due to higher repairs and maintenance costs related to the spring floods, increases in compressor rentals in various fields and the timing of the well workover program. Exploration Expenses. Exploration expenses decreased $92,000 (61 percent) in the second quarter of 1998 compared with the same period of 1997. This decrease is related to the absence of dry hole costs and other preliminary field costs incurred by the Company in 1997. Taxes other than Income. Taxes other than on income decreased $37,000 (7 percent) in the second quarter of 1998 compared to the same period in 1997. This decrease is a result of lower ad valorem taxes due in part to the sale of reserves in late 1997 of a certain area in northern West Virginia. General and Administrative. General and administrative expenses decreased $70,000 (9 percent) in the second quarter of 1998 compared with the second quarter in 1997. This decrease is due to the elimination of marketing fees charged on a portion of the Company's natural gas sales. Depreciation and Depletion. Depreciation and depletion expense increased $93,000 (6 percent) from $1,455,000 in the second quarter of 1997 to $1,548,000 in the second quarter 1998. Increased natural gas production in 1998 over 1997 and changes in reserve estimates in various fields at December 31, 1997 have resulted in increases in depletion rates in those fields. The rate increased from $0.74 per Mcfe in the second quarter of 1997 to $0.77 per Mcfe in the second quarter of 1998. Results of Operations - Six Months of 1998 and 1997 Compared. Natural Gas Sales. Natural gas sales decreased from $9.9 million in the first six months of 1998 to $9.7 million in the first six months of 1998. This slight decrease of two percent is a result of a decrease in pricing offset by an increase in volume. The natural gas sales volumes for the first six months of 1998 were 3,732 MMcf compared with 3,495 MMcf for the first six months of 1997. The average price received by the Company for its working interest gas was $2.59 per Mcf compared with $2.83 per Mcf for the same period of 1997. Oil and Condensate Sales. Oil sales decreased $178,000 (46 percent) for the first six months of 1998 compared with the first six months of 1997. This decrease resulted from a reduction in volume of four MBbls and a decrease in price per Bbl. The price per Bbl for the first six months of 1998 was $12.53 compared with $18.62 per Bbl for the first six months of 1997. Oil and Gas Royalties. Oil and gas royalties decreased $109,000 (13 percent) in the first six months of 1998 compared with the same period in 1997. This decrease resulted from a decline in volume of 7 MMcf and a decrease in price from $2.93 per Mcf in the first six months of 1997 compared with $2.62 per Mcf in the first six months of 1998. Other Income. Other income decreased $83,000 (37 percent) in the first six months of 1998 compared with the same period in 1997. This decrease is a result of lower gathering and compression fees received by the Company due to decreases in production. Operating Expenses. Operating expenses for the first six months of 1998 were $1.8 million, which is an increase of $236,000 (15 percent) compared with the first six months of 1997. On an Mcfe basis, operating expenses increased from $0.41 cents in the first six months of 1997 to $0.44 cents in the first six months of 1998. This increase is due to higher repairs and maintenance costs related to the spring floods, increases in compressor rentals in various fields and the timing of the well workover program. Exploration Expenses. Exploration expenses decreased $139,000 (59 percent) for the first six months of 1998 compared with the first six months of 1997. This decrease is a result of the absence of dry hole costs and other preliminary field costs incurred by the Company in 1998 compared with 1997. 9 Taxes other than Income. Taxes other than on income decreased $117,000 (10 percent) for the first six months of 1998 compared with 1997. This decrease is a result of lower ad valorem taxes due in part to the sale of reserves in late 1997 of a certain area in northern West Virginia as well as a reduction in business franchise taxes. General and Administrative. General and administrative expenses decreased $100,000 in the first six months of 1998 compared with the first six months of 1997. This decrease is related to the elimination of marketing fees charged on a portion of the Company's natural gas sales. Depreciation and Depletion. Depreciation and depletion expense increased $384,000 (14 percent) from $2,815,000 in the first six months of 1997 compared with $3,199,000 in the first six months of 1998. The rate increased from $0.72 per Mcfe in the first six months of 1997 to $0.78 per Mcfe in the first six months of 1998. Increased natural gas production in 1998 over 1997 and changes in reserve estimates in various fields at December 31, 1997 have resulted in increases in depletion rates in those fields. 10 Coal Operating income for the coal segment was $5.1 million for the six months of 1998 compared with $5.6 million for the six months of 1997. Operational and financial data for the Company's coal segment for the 1998 and 1997 second quarter and six months year to date is summarized in the following tables:
Operations Summary ----------------------------- Three Months Six Months Ended June 30, Ended June 30, -------------- -------------- 1998 1997 1998 1997 ------ ------ ------ ------ Production Coal tons (000's) 1,583 1,809 2,567 2,638 Timber (Mbf) 3,123 2,672 4,107 3,501 Average Realized Prices Coal royalties ($/ton) $ 2.11 $ 1.71 $ 2.30 $ 2.18 Timber ($/Mbf) 172 180 186 213 Average Costs (per ton) Lease operating $ 0.04 $ 0.06 $ 0.03 $ 0.06 Exploration expenses 0.10 0.03 0.07 0.04 Taxes other than on income 0.08 0.03 0.08 0.02 General and administrative 0.34 0.22 0.40 0.28 Depreciation, depletion and amortization 0.10 0.08 0.11 0.10 ------ ------ ------ ------ Total costs $ 0.66 $ 0.42 $ 0.69 $ 0.50
Financial Summary ----------------------------- Three Months Six Months Ended June 30, Ended June 30, -------------- -------------- 1998 1997 1998 1997 ------ ------ ------ ------ (Dollars in thousands) Revenues: Coal royalties $3,332 $3,094 $5,901 $5,739 Timber sales 618 604 827 810 Gain on sale of property - 10 - 19 Other income 107 69 188 354 ------ ------ ------ ------ Total revenues 4,057 3,777 6,916 6,922 ------ ------ ------ ------ Expenses: Operating expenses $ 61 $ 104 $ 89 $ 148 Exploration expenses 158 52 169 106 Taxes other than income 119 51 205 62 General and administrative 535 396 1,033 741 Loss on sale of property - - 1 1 Depreciation and depletion 151 142 293 260 ------ ------ ------ ------ Total expenses 1,024 745 1,790 1,318 ------ ------ ------ ------ Operating Income $3,033 $3,032 $5,126 $5,604 ====== ====== ====== ======
Results of Operations - Second quarters of 1998 and 1997 Compared. Coal Royalties. Coal royalties increased $238,000 (8 percent) in the second quarter of 1998 compared with the same period in 1997. This increase was primarily due to the recognition of previously deferred revenue associated with the cancellation of certain leases. The average realization per ton increased from $1.71 in the second quarter of 1997 to $2.11 in the second quarter of 1998. Timber. Timber sales increased $14,000 (2 percent) in the second quarter of 1998 compared with the second quarter of 1997. Volume sold increased from 2,672 thousand board feet (Mbf) in the second quarter of 1997 to 3,123 Mbf in the second quarter of 1998. This increase was related to the timing of the Company's parcel timber sales and timber harvested in advance of expected mining operations. 11 Other Income. Other income increased $38,000 (55 percent) for the second quarter of 1998 compared with the second quarter of 1997. This increase was related to wheelage income from the Company's properties. Operating Expenses. Operating expenses decreased $43,000 (41 percent) from $104,000 in the second quarter of 1997 to $61,000 in the second quarter of 1998. This decrease is a result of a change in the method of selling timber. In the prior year the Company contracted the harvesting of a portion of its timber and negotiated the sale of this timber directly with the mill. In the second quarter of 1998 the Company has had more parcel timber sales instead of the sales method used in the prior year. The Company sales method has the effect of increasing the operating costs. Exploration Expenses. Exploration expenses were $158,000 for the second quarter of 1998, which is an increase of 204 percent from the comparable 1997 time period. This increase in the second quarter is due to costs incurred for maintaining a mine on a terminated lease and the timing of the Company's core drilling program. Taxes other than Income. Taxes other than on income increased $68,000 (133 percent) from $51,000 in the second quarter of 1997 to $119,000 in the second quarter of 1998. This increase is a result of adjustments that the Company had recorded in 1997 related to property taxes compared with an actual number for 1998. General and Administrative. General and administrative expenses increased $139,000 (35 percent) from $396,000 in the second quarter of 1997 to $535,000 in the second quarter of 1998. This increase relates to salary and employee benefit increases associated with the opening of a satellite office in Charleston, West Virginia and an increase in legal fees. Legal fees increased due to the bankruptcy of one of the Company's lessees and the termination of the lease of another lessee due to the loss of a sales contract. Depreciation and Depletion. Depreciation and depletion increased $9,000 (6 percent) from $142,000 in the second quarter of 1997 to $151,000 in the second quarter of 1998. This increase was due to the production of reserves from the Company's Wise properties. Results of Operations - Six Months of 1998 and 1997 Compared. Coal Royalties. Coal royalties increased $162,000 (3 percent) in the first six months of 1998 compared with the same period in 1997. The average realization per ton increased from $2.18 in the first six months of 1997 to $2.30 in the first six months of 1998. This increase was primarily due to the recognition of previously deferred revenue associated with the cancellation of certain leases. Timber. Timber sales increased $17,000 (2 percent) in the first six months of 1998 compared with the first six months of 1997. Volume sold increased to 4,107 Mbf in the first six months of 1998 compared with 3,501 Mbf in the first six months of 1997. This increase was related to the timing of the Company's parcel timber sales and timber harvested in advance of expected mining. The average realized price per Mbf declined from $213 Mbf in the first six months of 1997 to $186 per Mbf in the first six months of 1998. Other Income. Other income decreased $166,000 (47percent) for the first six months of 1998 compared with the first six months of 1997. This decrease is a result of a decline in bonuses paid by new lessees to secure leases on the Company's Virginia coal properties. In 1997 the Company was actively leasing several coal properties for mining. Operating Expenses. Operating expenses decreased $59,000 (40 percent) for the first six months of 1998 compared with first six months of 1997. The decrease was a result of the method of selling timber in the first six months of 1998 compared with 1997. In the prior year the Company contracted the harvesting of a portion of its timber and negotiated the sale of this timber directly with the mill. The Company has had more parcel timber sales this year instead of selling the timber directly to the mill. Exploration Expenses. Exploration expenses increased $63,000 (59 percent) for the first six months of 1998 compared with the first six months of 1997. This increase is due to costs incurred to maintain a mine on a terminated lease. Taxes other than Income. Taxes other than on income increased $143,000 (231 percent) in the first six months of 1998 compared with the first six months of 1997. This increase is a result of adjustments the Company recorded in 1997 on property taxes. General and Administrative. General and administrative expenses increased $292,000 (39 percent) in the first six months of 1998 compared with the first six months of 1997. This increase is a result of personnel additions and salary and related employee benefit expense increases related to the opening of a satellite office in Charleston, West Virginia. Legal costs are also higher due to legal proceedings related to the bankruptcy of one of the Company's lessees and the termination of the lease of another lessee due to the loss of a sales contract. Depreciation and Depletion. Depreciation and depletion increased $33,000 (13 percent) in the first six months of 1998 compared with the first six months of 1997. The depletion rate per ton increased from $0.10 to $0.11. This increase was due to the production of reserves from the Company's Wise properties. 12 Capital Expenditures, Capital Resources and Liquidity Capital Expenditures. In the first six months of 1998, capital expenditures totaled $6.2 million compared with $13.2 million in the first six months of 1997. In the first six months of 1997 the Company successfully completed two coal reserve acquisitions. In January 1997, a transaction was completed for a property in Virginia. The Company acquired 10.5 million tons of high quality metallurgical coal reserves which have been leased to an operator and are actively being mined and sold under contract by the operator. The purchase price was approximately $7.0 million. In February 1997, the Company acquired 7.5 million tons of coal contiguous to its existing Wise property reserves for approximately $1.9 million. In the first six months of 1998, the Company successfully completed the repurchase of coal reserves previously sold to an operator under an installment sale. In the oil and gas segment the Company had capital expenditures totaling approximately $3.5 million in the first six months of 1998. The Company has drilled 25 gross (17.5 net) wells in the first six months of the year. The Company expects to drill approximately 50 net wells in 1998, with approximately 10 to 15 wells in exploratory areas. Capital Resources and Liquidity. Net cash provided by operating activities was $14.7 million in the first six months of 1998 compared with $10.3 million in the first six months of 1997. The Company's borrowings decreased from $33.9 million at the end of 1997 to $28.9 million at June 30, 1998. The Company has four fixed-price term agreements for a portion of its natural gas production to limit exposure to price fluctuations. Presently, the Company has sold approximately 8,500 net Mcf per day at a weighted average price in excess of $2.80 per Mcf. These physical sales cover various periods with termination dates of October 1998 and December 1998. Additionally, the Company has two natural gas derivative transactions. The financial instruments executed provide a price floor to limit downside price risk and a market participation price that allows the Company to receive the benefit of a price upturn. One financial transaction is for 5,000 MMBtu per day with a floor of approximately $2.10 per MMBtu and market re-opener at $2.48 per MMBtu with a term from May 1997 through October 1999. The second transaction is also for 5,000 MMBtu per day with a floor of approximately $2.10 per MMBtu and market re-opener at $2.35 per MMBtu with a term from November 1997 through October 1999. The Company also holds an investment in Norfolk Southern common stock. At June 30, 1998, the Company had an unrealized holding gain of approximately $95.8 million. The Company recovered the lease on its Bull Creek property from the lessee who is in Chapter 11 Bankruptcy proceedings. Subsequently the Company re-entered into a lease agreement for a portion of the Bull Creek reserves. Anticipated production of Bull Creek reserves under this lease is expected to commence by the second quarter of 1999. A Buchanan property lessee lost a sales contract earlier this year and ceased production in the first quarter of 1998. A new lease for these reserves has been negotiated with another operator. Production is expected to resume in the third quarter of 1998. Year 2000 The Company is investigating the extent to which the Company's currently installed information technology and non- information technology systems, and those of third parties with whom the Company conducts business, will be affected by what is commonly known as the "Year 2000" problem. The Company has reviewed its Year 2000 issues and has inquired and received verbal or written assurances from a majority of its providers as to their progress in addressing Year 2000 issues and that such providers expect to be Year 2000 compliant in all material respects. The Company estimates that costs incident to Year 2000 compliance will not exceed $100,000. Based on information known at this time, the Company expects to be Year 2000 compliant in all material respects in a timely manner and does not believe that Year 2000 compliance will have a material adverse effect on the Company. No assurance can be given, however, that all of the Company's systems or those of third parties with whom the Company conducts business will be Year 2000 compliant, that compliance costs will not exceed expected amounts or that the impact of any failure by the Company or any such third party to achieve Year 2000 compliance will not have a material adverse effect on the Company. 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 13 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. 14 PART II Other information Item 5. Shareholder Proposals Any shareholder who, in accordance with and subject to the provisions of the proxy rules of the Securities and Exchange commission, wishes to submit a proposal for inclusion in the Company's proxy statement for its 1999 Annual meeting of Shareholders must deliver such proposal in writing to the Company's Secretary at the Company's principal executive offices at One Radnor Corporate Center, Suite 200, 100 Matsonford Road, Radnor, Pennsylvania 19087, not later than November 27, 1998. Pursuant to new amendments to Rule 14a-4(c) of the Securities Exchange Act of 1934, as amended, and the Company's By-laws, if a shareholder who intends to present a proposal at the 1999 Annual Meeting of Shareholders does not notify the Company of such proposal on or prior to the earlier of 90 days prior to the date of the 1999 Annual Meeting or February 3,1999, then management proxies will be permitted to use their discretionary authority to vote on the proposal when the proposal is raised at the 1999 Annual Meeting of Shareholders, even though there is no discussion of the proposal in the 1999 proxy statement. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits (27) Financial Data Schedule, filed herewith. (b) Reports on Form 8-K No reports on Form 8-K were filed for the quarter ended June 30, 1998. 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PENN VIRGINIA CORPORATION Date: August 14, 1998 By: /s/ Steven W. Tholen --------------- ----------------------- Steven W. Tholen, Vice President and Chief Financial Officer Date: August 14, 1998 By: /s/ Ann N. Horton --------------- ------------------------ Ann N. Horton, Controller and Principal Accounting Officer 16 PENN VIRGINIA CORPORATION INDEX - ----------------------------------------------------------------- PAGE PART I Financial Information: Item 1. Financial Statements Condensed Consolidated Statements of Income for the three and six months ended June 30, 1998 and 1997 1 Condensed Consolidated Balance Sheets as of June 30, 1998 and December 31, 1997 2 Condensed Consolidated Statements of Cash Flows for the three and six months ended June 30, 1998 and 1997 4 Notes to Condensed Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 PART II Other Information Item 5. Shareholder Proposals 15 Item 6. Exhibits and Reports on Form 8-K 15 Article 5 of Regulation S-X EX-27 2 ART 5 FDS FOR 2NDQUARTER 10-Q
5 1000 6-MOS DEC-31-1998 JUN-30-1998 2,799 0 3,251 0 244 8,379 197,484 65,170 240,678 5,776 0 0 0 55,887 110,108 240,678 17,352 19,042 1,917 1,917 9,099 0 999 8,511 1,693 6,818 0 0 0 6,818 0.82 0.80
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