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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.)