SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the period ended September 30, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from _______________ to _______________
PENN VIRGINIA CORPORATION
________________________________________________________________
(Exact name of registrant as specified in its charter)
Virginia 23-1184320
_________________________________________________________________
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 MATSONFORD ROAD SUITE 200
RADNOR, PA 19807
_________________________________________________________________
(Address of principal executive offices) (Zip Code)
(610) 687-8900
_________________________________________________________________
(Registrant's telephone number, including area code)
_________________________________________________________________
(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Number of shares of common stock of registrant
outstanding at November 4, 1998: 8,964,767
PENN VIRGINIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1998 1997 1998 1997
------ ------ ------- -------
(Unaudited) (Unaudited)
Revenues:
Natural gas $4,715 $4,091 $14,373 $13,995
Oil and condensate 47 149 260 540
Natural gas royalties 442 341 1,195 1,203
Coal royalties 2,659 2,859 8,560 8,598
Timber 327 539 1,154 1,349
Dividends 662 662 1,985 1,985
Gain on sale of property 21 22 45 57
Other income 925 90 1,268 689
------ ------ ------- -------
Total revenues $9,798 $8,753 $28,840 $28,416
Expenses:
Operating expenses $ 953 $1,001 $ 2,870 $ 2,741
Exploration expenses 387 472 655 812
Taxes other than income 701 455 2,048 1,775
General and administrative 1,725 1,727 5,653 5,604
Loss on sale of property - - 5 3
Depreciation, depletion,
amortization 1,697 1,534 5,248 4,661
------ ------ ------- -------
Total expenses $5,463 $5,189 $16,479 $15,596
Operating Income $4,335 $3,564 $12,361 $12,820
Other (Income) Expense:
Interest expense $ 488 $ 568 $ 1,487 $ 1,682
Gain on sale of securities - - (14) -
Other income (610) (985) (2,080) (2,869)
------ ------ ------- -------
Income before income tax $4,457 $3,981 $12,968 $14,007
Income tax expense 1,015 892 2,708 3,047
------ ------ ------- -------
Net Income $3,442 $3,089 $10,260 $10,960
====== ====== ======= =======
Net Income per share, basic 0.41 0.37 1.24 1.32
====== ====== ======= =======
Net Income per share, diluted 0.41 0.36 1.21 1.29
====== ====== ======= =======
Weighted average shares
outstanding (in thousands) 8,308 8,274 8,292 8,311
====== ====== ======= =======
<FN>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
PENN VIRGINIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
September 30, December 31,
1998 1997
------------- ------------
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 1,821 $ 831
Accounts receivable 2,897 7,404
Current portion of long-term
notes receivable 1,077 2,414
Current deferred income taxes 696 696
Inventories 282 233
Prepaid expenses 211 311
-------- --------
Total current assets 6,984 11,889
Investments 96,125 100,885
Long-term notes receivable 779 4,195
Oil and gas properties; wells and
equipment, using the successful
efforts method of accounting 159,040 148,487
Other property, plant and equipment 46,643 42,626
Less: Accumulated depreciation, (66,845) (61,677)
depletion and amortization -------- --------
Total property, plant and equipment 138,838 129,436
-------- --------
Intangible assets, net of amortization 552 537
Other assets 257 288
-------- --------
Total assets $243,535 $247,230
======== ========
<FN>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
-2-
PENN VIRGINIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
September 30, December 31,
1998 1997
------------- ------------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current installments on
long-term debt $ 25 $ 2,025
Accounts payable 1,434 1,828
Accrued expenses 3,398 6,029
Deferred income 83 279
-------- --------
Total current liabilities 4,940 10,161
Other liabilities 3,065 4,659
Deferred income taxes 36,789 36,640
Long-term debt 32,381 31,903
-------- --------
Total liabilities 77,175 83,363
Commitments and contingencies - -
Minority interest 152 163
-------- --------
152 163
Shareholders' equity
Preferred stock of $100 par value-
authorized 100,000 shares; none issued - -
Common stock of $6.25 par value-
authorized 16,000,000 shares,
issued 8,921,866 shares and
8,901,434 shares in 1998 and 1997,
respectively 55,887 55,634
Other paid-in capital 8,532 8,431
Retained earnings 56,475 51,813
-------- --------
120,894 115,878
Less: 607,973 shares in 1998 and
627,108 in 1997 of common stock
held in treasury, at cost 13,594 14,024
Pension liability 228 228
Unearned compensation - ESOP 1,500 1,650
Add: Net unrealized investment
holding gain 60,636 63,728
-------- --------
Total shareholders' equity 166,208 163,704
-------- --------
Total liabilities and shareholders'
equity $243,535 $247,230
======== ========
<FN>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
-3-
PENN VIRGINIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED CASH FLOW STATEMENTS
(Dollars in thousands)
Three Months
Ended September 30,
------------------------
1998 1997
---------- -----------
(Unaudited)
Cash flow from operating activities:
Net Income $ 3,442 $ 3,089
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation, depletion, and
amortization 1,697 1,534
Gain on sale of securities - -
Gain on sale of property, plant
and equipment (21) (22)
Deferred income taxes 797 735
Minority interest in subsidiary (4) (4)
Other (392) (473)
Changes in operating assets and
liabilities:
Current assets 419 1,067
Current liabilities (835) (714)
Other assets (33) (35)
Other liabilities 59 (46)
-------- --------
Net Cash provided by
operating activities $ 5,129 $ 5,131
Cash flows from investing activities:
Proceeds from the sale of securities $ - $ -
Proceeds from notes 275 1,018
Proceeds from sale of fixed assets 21 23
Capital expenditures (8,258) (4,622)
-------- --------
Net Cash used in investing activities $(7,962) $(3,581)
Cash flows from financing activities:
Dividends paid $(1,868) $(1,861)
Proceeds from long-term debt borrowings 3,500 1,800
Repayment of long-term debt principal (25) (1,925)
Purchase of treasury stock - -
Issuance of stock 248 95
-------- --------
Net Cash provided by (used in)
financing activities $ 1,855 $(1,891)
Net increase (decrease) in cash
and cash equivalents $ (978) $ (341)
Cash and cash equivalents-beginning balance 2,799 1,411
-------- --------
Cash and cash equivalents-ending balance $ 1,821 $ 1,070
======== ========
Supplemental disclosures of cash flow information:
Cash paid to date for:
Interest $ 520 $ 516
Income taxes 300 100
Nine Months
Ended September 30,
------------------------
1998 1997
---------- -----------
(Unaudited)
Cash flow from operating activities:
Net Income $10,260 $10,960
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation, depletion, and
amortization 5,248 4,661
Gain on sale of securities (14) -
Gain on sale of property, plant
and equipment (40) (54)
Deferred income taxes 1,814 1,192
Minority interest in subsidiary (12) (12)
Other (1,370) (1,795)
Changes in operating assets and
liabilities:
Current assets 4,559 2,243
Current liabilities (3,024) (1,613)
Other assets 4,195 (79)
Other liabilities (1,791) (94)
-------- --------
Net Cash provided by
operating activities $ 19,825 $ 15,409
Cash flows from investing activities:
Proceeds from the sale of securities $ 17 $ 350
Proceeds from notes 1,973 3,518
Proceeds from sale of fixed assets 80 92
Capital expenditures (14,666) (17,808)
-------- --------
Net Cash used in investing activities $(12,596) $(13,848)
Cash flows from financing activities:
Dividends paid $ (5,597) $ (5,582)
Proceeds from long-term debt borrowings 3,500 20,313
Repayment of long-term debt principal (5,075) (8,892)
Purchase of treasury stock - (8,728)
Issuance of stock 933 505
--------- ---------
Net Cash provided by (used in)
financing activities $ (6,239) $ (2,384)
Net increase (decrease) in cash
and cash equivalents $ 990 $ (823)
Cash and cash equivalents-beginning balance 831 1,893
-------- --------
Cash and cash equivalents-ending balance $ 1,821 $ 1,070
======== ========
Supplemental disclosures of cash flow information:
Cash paid to date for:
Interest $ 1,540 $ 1,693
Income taxes 1,000 556
<FN>
The accompanying notes are an integral part of these condensed
consolidated financial statements.
-4-
PENN VIRGINIA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998
(1) ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements
of Penn Virginia Corporation and its subsidiaries (the "Company")
have been prepared in accordance with generally accepted
accounting principles for interim financial reporting and SEC
regulations. These statements involve the use of estimates and
judgments where appropriate. In the opinion of management, all
adjustments, consisting of normal recurring accruals, considered
necessary for a fair presentation have been included. These
financial statements should be read in conjunction with the
Company's consolidated financial statements and footnotes
included in the Company's December 31, 1997 annual report on Form
10-K. Operating results for the nine months ended September 30,
1998 are not necessarily indicative of the results that may be
expected for the year ended December 31, 1998.
(2) SECURITIES
The cost, gross unrealized holding gains or losses and
market value for available-for-sale securities at September 30,
1998 were as follows (in thousands):
Gross Unrealized Market
Cost Holding Gain Value
------- ---------------- ------
Available-for-Sale:
Norfolk Southern Corporation $2,839 $93,277 $96,116
Other - 9 9
------ ------- -------
$2,839 $93,286 $96,125
(3) LEGAL
The Company is involved in various legal proceedings arising
in the ordinary course of business. While the ultimate results of
these cannot be predicted with certainty, Company management
believes these claims will not have a material effect on the
Company's financial position, liquidity or operations.
(4) EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings Per Share" which establishes new standards for
computing and presenting earnings per share. The provisions of
the statement are effective for fiscal years ending after
December 15, 1997.
The following is a reconciliation of the numerators and
denominators used in the calculation of basic and diluted
earnings per share ("EPS") for income from continuing operations
at September 30, 1998 and 1997.
Three Months Ended
September 30, 1998
-------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
(In thousands except per share amounts)
Basic EPS:
Income from continuing operations $3,442 8,308 $0.41
Dilutive Securities:
Stock options - 153
------ -----
Diluted EPS:
Income from continuing operations $3,442 8,461 $0.41
Three Months Ended
September 30, 1997
-------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
(In thousands except per share amounts)
Basic EPS:
Income from continuing operations $3,089 8,274 $0.37
Dilutive Securities:
Stock options - 224
------ -----
Diluted EPS:
Income from continuing operations $3,089 8,498 $0.36
-5-
Nine Months Ended
September 30, 1998
-------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
(In thousands except per share amounts)
Basic EPS:
Income from continuing operations $10,260 8,292 $1.24
Dilutive Securities:
Stock options - 217
------ -----
Diluted EPS:
Income from continuing operations $10,260 8,509 $1.21
Nine Months Ended
September 30, 1997
-------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
(In thousands except per share amounts)
Basic EPS:
Income from continuing operations $10,960 8,311 $1.32
Dilutive Securities:
Stock options - 172
------ -----
Diluted EPS:
Income from continuing operations $10,960 8,483 $1.29
(5) COMPREHENSIVE INCOME
In the first quarter of 1998, the Company adopted SFAS No.
130, "Reporting Comprehensive Income," which requires the display
of comprehensive income and its components in the financial
statements. Comprehensive income represents all changes in equity
during the reporting period, including net income and charges
directly to equity, which are excluded from net income. For the
three and nine month periods ended September 30, 1998 and 1997,
the components of comprehensive income are as follows:
Three Months
Ended September 30,
-----------------------
1998 1997
--------- ---------
Net income $ 3,442 $ 3,089
Unrealized holding gains (losses)
on available for sale securities (1,607) 1,792
-------- -------
Comprehensive income $ 1,835 $ 4,881
Nine Months
Ended September 30,
-----------------------
1998 1997
--------- ---------
Net income $10,260 $10,960
Unrealized holding gains (losses)
on available for sale securities (3,092) 10,928
-------- -------
Comprehensive income $ 7,168 $21,888
(6) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the Financial Accounting Standards Board
issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities". The Statement establishes accounting and
reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. The Statement requires that
changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met.
Special accounting for qualifying hedges allows a derivative's
gains and losses to offset related results on the hedged item in
the income statement, and requires that a company must formally
document, designate, and assess the effectiveness of transactions
that receive hedge accounting.
Statement No. 133 is effective for fiscal years beginning
after June 15, 1999. A company may also implement the Statement
as of the beginning of any fiscal quarter after issuance (that
is, fiscal quarters beginning June 16, 1998 and thereafter).
Statement No. 133 cannot be applied retroactively and must be
applied to (a) derivative instruments and (b) certain derivative
instruments embedded in hybrid contracts that were issued,
acquired, or substantively modified after December 31, 1997 (and,
at the Company's election, before January 1, 1998.)
The Company has not yet quantified the impacts of adopting
Statement No. 133 on our financial statements and has not
determined the timing of or method of our adoption of Statement
No. 133. However, the Statement could increase volatility in
earnings and other comprehensive income.
(7) START-UP ACTIVITIES
In April 1998, the AICPA issued SOP 98-5, "Reporting on the
Costs of Start-Up Activities," which requires costs of start-up
activities to be expensed as incurred. This statement is
effective for financial statements beginning after December 15,
1998 and requires entities to expense currently capitalized costs
related to start-up activities as a cumulative effect of a change
in accounting principle upon adoption of this statement. The
impact of this new standard is not expected to have a material
impact on the Company's financial position or results of
operations.
-6-
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company operates in two business segments: oil and gas
and coal. The oil and gas segment explores for, develops and
produces crude oil and natural gas in Western Virginia, Southern
West Virginia and Eastern Kentucky. The coal segment includes
Penn Virginia's mineral rights to coal reserves, its timber and
land assets. The Company also owns mineral rights to oil and gas
reserves.
Results of Operations - Third quarters of 1998 and 1997 Compared.
Penn Virginia reported 1998 third quarter earnings of $3.4
million or $0.41 per share (diluted) compared with $3.1 million
or $0.36 per share (diluted) for the third quarter of 1997. On a
consolidated basis, revenues increased $1.0 million in the third
quarter of 1998 due to a $0.6 million increase in oil and gas
segment revenues and a $0.4 million increase in coal segment
revenues.
Results of Operations - Nine months of 1998 and 1997 Compared.
Penn Virginia reported 1998 nine months earnings of $10.3 million
or $1.21 per share (diluted) compared with $11.0 million or $1.29
per share (diluted) for the nine months of 1997. On a
consolidated basis, revenues increased $0.4 million as a result
of increases in coal segment revenues. Expenses on a consolidated
basis were $0.9 million higher than the 1997 comparable period,
which was primarily attributable to a $0.5 million increase in
depletion and depreciation from the oil and gas segment.
Selected operating and financial data by segment is presented
below.
Oil and Gas
Operating income for the oil and gas segment was $4.8 million for
the nine months ended September 30, 1998, compared with $5.2
million for the same period in 1997. Operational and financial
data for the Company's oil and gas segment for the 1998 and 1997
three and nine months ended September 30 is summarized in the
following tables:
Operations Summary
------------------
Three Months
Ended September 30,
-----------------------
1998 1997
--------- ---------
Production
Natural gas (MMcf)-Working Interest 1,776 1,654
Natural gas (MMcf)-Royalty Interest 187 139
Oil and condensate (MBbls) 5 9
Production, MMcfe 1,993 1,847
Average Realized Prices
Natural gas ($/Mcf)- Working Interest $ 2.65 $ 2.47
Natural gas ($/Mcf)- Royalty Interest 2.36 2.45
Oil and condensate ($/Bbl) 9.40 16.56
Average Costs (per MMcfe)
Lease operating $ 0.46 $ 0.48
Exploration expenses 0.10 0.19
Taxes other than income 0.28 0.20
General and administrative 0.31 0.33
Depreciation, depletion and amortization 0.77 0.75
----- -----
Total costs $1.92 $1.95
Nine Months
Ended September 30,
-----------------------
1998 1997
--------- ---------
Production
Natural gas (MMcf)-Working Interest 5,508 5,149
Natural gas (MMcf)-Royalty Interest 474 433
Oil and condensate (MBbls) 22 30
Production, MMcfe 6,114 5,762
Average Realized Prices
Natural gas ($/Mcf)- Working Interest $ 2.61 $ 2.72
Natural gas ($/Mcf)- Royalty Interest 2.52 2.78
Oil and condensate ($/Bbl) 11.82 18.00
Average Costs (per MMcfe)
Lease operating $ 0.45 $ 0.43
Exploration expenses 0.05 0.10
Taxes other than income 0.27 0.27
General and administrative 0.31 0.34
Depreciation, depletion and amortization 0.77 0.73
----- ------
Total costs $1.85 $ 1.87
-7-
Approximately half of the Company's 1998 working interest natural
gas production was sold at market prices, with the remainder sold
under fixed-price term contracts. The Company will, when
circumstances warrant, hedge the price received for market-
sensitive production through the use of swaps with purchased
options. Gains and losses from hedging activities are included in
natural gas revenues when the hedged production occurs. In the
third quarter of 1998, the Company recognized a $20,000 gain on
hedging activities compared with a $119,000 loss in the third
quarter of 1997. For the first nine months of 1998, the Company
recognized a loss of $377,000 on hedging activities compared with
$206,000 in 1997. The following table shows the effect of hedging
activities on the Company's working interest natural gas prices:
Hedging Summary
---------------
Three Months
Ended September 30,
------------------------
1998 1997
Natural gas prices ($/Mcf):
Actual price received for production $ 2.64 $ 2.54
Effect of hedging activities .01 (0.07)
------ -------
Average price $ 2.65 $ 2.47
Nine Months
Ended September 30,
------------------------
1998 1997
Natural gas prices ($/Mcf):
Actual price received for production $ 2.68 $ 2.76
Effect of hedging activities (0.07) (0.04)
------ -------
Average price $ 2.61 $ 2.72
Financial Summary
-----------------
Three Months
Ended September 30,
---------------------
1998 1997
------- -------
(Dollars in thousands)
Revenues:
Natural gas sales $ 4,715 $ 4,091
Oil and gas royalties 442 341
Oil and condensate 47 149
Gain on the sale of property 2 -
Other income 45 54
------- -------
Total revenues $ 5,251 $ 4,635
------- -------
Expenses:
Operating expenses $ 919 $ 890
Exploration expenses 197 350
Taxes other than income 567 371
General and administrative 616 610
Loss on the sale of property - 2
Depreciation and depletion 1,523 1,383
------- -------
Total expenses 3,822 3,606
------- -------
Operating Income $ 1,429 $ 1,029
======= =======
Nine Months
Ended September 30,
------------------------
1998 1997
------ ------
(Dollars in thousands)
Revenues:
Natural gas sales $14,373 $13,995
Oil and gas royalties 1,195 1,203
Oil and condensate 260 540
Gain on the sale of property 2 16
Other income 223 299
------- -------
Total revenues $16,053 $16,053
Expenses:
Operating expenses $ 2,747 $ 2,482
Exploration expenses 292 584
Taxes other than income 1,648 1,569
General and administrative 1,889 1,983
Loss on the sale of property 4 3
Depreciation and depletion 4,722 4,198
------- -------
Total expenses 11,302 10,819
------- -------
Operating Income $ 4,751 $ 5,234
======= =======
Results of Operations - Oil and Gas Segment.
Revenues. Revenues increased $0.7 million, or 15 percent, to
$5.3 million in the third quarter of 1998, compared with $4.6
million for the same period of 1997. This increase was primarily
a result of a $0.6 million increase in natural gas sales.
Despite a $0.3 million decline in oil and condensate, revenues
for the first nine months of 1998 and 1997 remained constant at
$16.1 million for both periods due to a $0.4 million increase in
natural gas sales.
Natural gas sales increased $624,000, or 15 percent, in the third
quarter of 1998 due to a seven percent increase in natural gas
volumes. Additionally, the average price received by the Company
for its working interest gas in the third quarter of 1998 was
$2.65 per thousand cubic feet (Mcf) compared with $2.47 per Mcf
for the same period of 1997.
Oil and condensate revenues decreased $102,000 and $280,000 for
the three and nine months ended September 30, 1998 from $149,000
and $540,000 for the comparable periods in 1997. These decreases
are attributable to a combination of production declines and
lower average prices received. Volumes were reduced to five
MBbls and 22 MBbls for the third quarter and first nine months of
1998 from nine MBbls and 30 MBbls in the comparable 1997 periods.
Prices decreased $7.16, or 43 percent, for the third quarter of
1998 compared with the same period of 1997 and $6.18, or 34
percent, for the first nine months of 1998 compared with the same
period of 1997.
-8-
Expenses. Expenses for the oil and gas segment increased to $3.8
million and $11.3 million for the three and nine months ended
September 30, 1998, respectively, compared with $3.6 million
and $10.8 million for the same periods in 1997. These
fluctuations are primarily due to increases in taxes other than
income and depreciation and depletion, offset by a decrease in
exploration expenses.
Lease operating expenses increased three percent to $919,000 in the
third quarter of 1998 compared with $890,000 for the same period
in 1997 due to an increase in natural gas production. On a Mcfe
basis, lease operating expenses decreased to $0.46 cents in the
third quarter of 1998 from $0.48 cents in 1997. For the first
nine months of 1998, lease operating expenses increased to $2.7
million from $2.5 million for the comparable 1997 period. On a
Mcfe basis, lease operating expenses increased to $0.45 cents for
the first nine months of 1998 from $0.43 cents in 1997. This
slight increase was due to higher repair and maintenance costs
related to the spring floods and increases in compressor rentals
in various fields.
Exploration expenses decreased to $197,000 and $292,000 for the
three and nine months ended September 30, 1998 from $350,000 and
$584,000 for the same periods in 1997. These decreases related
to the absence of dry hole costs and other preliminary field
costs incurred by the Company in the 1997 periods.
Taxes other than income increased 53 percent to $567,000 in the
third quarter of 1998 compared with $371,000 in the same period
of 1997. The difference is attributable to increased severance
taxes generated by higher natural gas revenues and a significant
ad valorem increase relating to the Company's West Virginia
properties. For the nine months ended September 30, 1998, taxes
other than income increased 5 percent, or $79,000, from the
comparable 1997 amount. This increase was a result of the
aforementioned severance tax and ad valorem tax increases, offset
by a reduction in ad valorem taxes from the sale of certain
reserves in late 1997.
Depreciation and depletion increased to $1.5 million and $4.7
million for the third quarter and first nine months of 1998 from
$1.4 million and $4.2 million for the same periods in 1997. The
contributing factors are increased natural gas production and
higher depletion rates in certain fields due to changes in
reserve estimates at December 31, 1997.
-9-
Coal
Operating income for the coal segment was $8.1 million for the
nine months of 1998 and $8.2 million for the comparable period of
1997. The coal segment's operational and financial data for the
1998 and 1997 third quarter and nine month period is summarized
in the following tables:
Operations Summary
---------------------
Three Months
Ended September 30,
---------------------
1998 1997
------- -------
Production
Coal tons (000's) 1,288 1,351
Timber (Mbf) 1,669 2,436
Average Realized Prices
Coal royalties ($/ton) $ 2.06 $ 2.12
Timber ($/Mbf) 177 204
Average Costs (per ton)
Lease operating $ 0.03 $ 0.08
Exploration expenses 0.15 0.09
Taxes other than on income 0.09 0.05
General and administrative 0.29 0.30
Depreciation, depletion and amortization 0.11 0.09
------ ------
Total costs $ 0.67 $ 0.61
Nine Months
Ended September 30,
---------------------
1998 1997
------- -------
Production
Coal tons (000's) 3,855 3,989
Timber (Mbf) 5,776 5,937
Average Realized Prices
Coal royalties ($/ton) $ 2.22 $ 2.16
Timber ($/Mbf) 183 209
Average Costs (per ton)
Lease operating $ 0.03 $ 0.07
Exploration expenses 0.09 0.06
Taxes other than on income 0.08 0.03
General and administrative 0.37 0.29
Depreciation, depletion and amortization 0.11 0.10
------ ------
Total costs $ 0.68 $ 0.55
Financial Summary
-----------------------
Three Months
Ended September 30,
---------------------
1998 1997
------- -------
(Dollars in thousands)
Revenues:
Coal royalties $ 2,659 $ 2,859
Timber sales 327 539
Gain on sale of property 43 23
Other income 857 36
------ ------
Total revenues 3,886 3,457
------ ------
Expenses:
Operating expenses $ 34 $ 112
Exploration expenses 190 121
Taxes other than income 114 61
General and administrative 382 400
Loss on sale of property - -
Depreciation and depletion 144 123
------ ------
Total expenses 864 817
------ ------
Operating Income $ 3,022 $ 2,640
======= =======
Nine Months
Ended September 30,
---------------------
1998 1997
------- -------
(Dollars in thousands)
Revenues:
Coal royalties $ 8,560 $ 8,598
Timber sales 1,154 1,349
Gain on sale of property 43 42
Other income 1,045 390
------- ------
Total revenues 10,802 10,379
Expenses:
Operating expenses $ 123 $ 260
Exploration expenses 359 227
Taxes other than income 319 123
General and administrative 1,415 1,141
Loss on sale of property 1 1
Depreciation and depletion 437 383
------ ------
Total expenses 2,654 2,135
------ ------
Operating Income $ 8,148 $ 8,244
======= =======
Results of Operations - Coal Segment.
Revenues. Revenues increased 11 percent to $3.9 million in the
third quarter of 1998 and four percent to $10.8 million for the
first nine months of 1998, as compared with $3.5 million and
$10.4 million for the same periods in 1997.
Coal royalties decreased $200,000, or seven percent, in the third
quarter of 1998 and $38,000 for the first nine months of 1998,
compared with the same periods in 1997. These decreases are
primarily attributable to a slight decline in coal production
related to conflicts incurred by three of the Company's lessees.
The average realization per ton for the first nine months of
1998 increased to $2.22 from the comparable 1997 amount of $2.16.
Timber sales decreased $212,000, or 39 percent, in the third
quarter of 1998 and $195,000, or 14 percent, for the first nine
months of 1998, compared with the same periods in 1997.
Volume sold decreased from 2,436 thousand board feet (Mbf) in the
third quarter of 1997 to 1,669 Mbf in
-10-
the third quarter of 1998 primarily due to timber harvested from
the Company's Bull Creek property during the third quarter of
1997. Additionally, the average realized price declined from
$204 Mbf and $209 Mbf for the three and nine months ended
September 30, 1997, respectively, to $177 Mbf and $183 Mbf for
the comparable periods in 1998. An alteration in the method of
selling timber resulted in decreases in the average price per
Mbf. In 1997, the Company contracted the harvesting of a portion
of its timber and negotiated the sale of this timber directly
with the purchaser. Throughout the majority of 1998, the Company
has concentrated on selling its timber by parcels which allows
substantial operating costs to be incurred by the purchaser;
thus, reducing the price received, on a Mbf basis.
Other income increased $821,000 in the third quarter of 1998 and
$655,000 for the first nine months of 1998, as compared with the
same periods in 1997. These increases were due to a $759,000
receipt for a power line relocation in September 1998. The
Company, from time to time, receives restitution for
circumstances that inhibit mining reserves in a certain location.
Expenses. Expenses increased six percent to $864,000 in the third
quarter of 1998 and 29 percent to $2.7 million for the first nine
months of 1998, compared with $817,000 and $2.1 million for
the same periods in 1997 primarily due to increases in taxes
other than income and general and administrative expenses, offset
by a decrease in operating expenses.
Operating expenses decreased to $34,000 and $123,000 for the
three and nine months ended September 30, 1998, from $112,000 and
$260,000 for the same periods in 1997. These decreases are a
result of the aforementioned change in the method of selling
timber.
Taxes other than income increased to $114,000 and $319,000 for
the three and nine month periods ended September 30, 1998 from
$61,000 and $123,000 for the comparable periods in 1997. These
increases result from downward property tax adjustments recorded
in 1997.
General and administrative expenses decreased five percent to
$382,000 in the third quarter of 1998 and increased 27 percent to
$1.4 million for the first nine months of 1998, compared with
$400,000 and $1.1 million for the same periods in 1997. While
the third quarter remained constant, the first nine months of
1998 increased as a result of personnel additions related to the
opening of a satellite office in Charleston, West Virginia during
the last half of 1997. Furthermore, unexpected legal costs were
incurred during the first half of 1998 to protect the Company's
interests relating to a lease termination by a lessee and another
lessee's bankruptcy.
-11-
Capital Resources and Liquidity.
Net Cash Provided by Operating Activities.
Funding for the Company's business activities has historically
been provided by operating cash flows and bank borrowings. Net
cash provided by operating activities was $19.8 million in the
first nine months of 1998 compared with $15.4 million in the
first nine months of 1997. The Company's consolidated cash
balance increased from $0.8 million at the end of 1997 to $1.8
million at September 30, 1998 while consolidated borrowings
decreased from $33.9 million to $32.4 million for the same
periods, respectively.
The Company, from time to time, uses various contracts to
mitigate the volatility of price changes on commodities the
Company produces and sells as well as to lock in prices to
protect the economics related to certain capital projects.
Currently, the Company has four fixed-price term agreements for a
portion of its natural gas production. The Company has sold
approximately 8,900 net Mcf per day at a weighted average price
in excess of $2.80 per Mcf for the majority of 1998. These
physical sales cover various periods with termination dates of
October 1998 and December 1998. Additionally, the Company has two
natural gas derivative transactions. The financial instruments
executed provide a price floor to limit downside price risk and a
market participation price that allows the Company to receive the
benefit of a price upturn. One financial transaction is for 5,000
MMBtu per day with a floor of approximately $2.10 per MMBtu and
market re-opener at $2.48 per MMBtu with a term from May 1997
through October 1999. The second transaction is for 5,000 MMBtu
per day with a floor of approximately $2.10 per MMBtu and market
re-opener at $2.35 per MMBtu with a term from November 1997
through October 1999.
The Company recovered the lease on its Bull Creek property from
the lessee who is in bankruptcy proceedings. Subsequently, the
Company re-entered into a lease agreement for a portion of the
Bull Creek reserves. Anticipated production of Bull Creek
reserves under this lease is expected to commence by the second
quarter of 1999.
Net Cash Used in Investing Activities.
Net cash used in investing activities totaled $12.6 million and
$13.8 million for the first nine months of 1998 and 1997,
respectively. In the first nine months of 1998, capital
expenditures totaled $14.7 million compared with $17.8 million in
the first nine months of 1997. Acquisitions and oil and gas
development activities were the primary uses of funds. The
capital expenditures, including acquisitions, made by the Company
for the first nine months of 1998 and 1997 are as follows:
Nine Months
Ended September 30,
--------------------------
1998 1997
------- --------
(in thousands)
Oil and Gas
Acquisitions $ 3,356 $ 253
Development 6,704 6,304
Exploration 412 2,171
Support equipment 172 98
Coal
Acquisitions 3,123 8,954
Support equipment and facilities 887 21
Other 12 7
-------- --------
Total capital expenditures $ 14,666 $ 17,808
In the oil and gas segment, the Company had capital expenditures
totaling $10.6 million in the first nine months of 1998. The
Company has successfully completed several acquisitions, which
included a $2.3 million acquisition in September 1998 of
additional interests in various producing properties in West
Virginia. Additionally, the Company drilled 49 gross (35.9 net)
development wells and four gross (1.6 net) exploratory wells in
the first nine months of 1998. The Company expects to drill
approximately 50 net wells in 1998, with approximately 10 wells
in exploratory areas.
In the first nine months of 1998, the Company successfully
completed a $2.9 million repurchase of coal reserves previously
sold to an operator under an installment sale.
The Company also holds an investment in Norfolk Southern common
stock which had an unrealized holding gain of approximately $93.3
million at September 30, 1998.
Net Cash Used in Financing Activities.
Net cash used in financing activities totaled $6.2 million and
$2.4 million for the first nine months of 1998 and 1997,
respectively. Net cash used in financing activities was
primarily used to fund the payment of $5.6 million in dividends
in 1998.
The Company has a $75 million unsecured revolving credit facility
(the "Revolver") with a final maturity of August 2000. The
Revolver contains financial covenants requiring the Company to
maintain certain levels of net worth, debt-to-capitalization and
dividend limitation requirements among other restrictions. The
outstanding balance on the Revolver was $31.5 million at
September 30, 1998 and $31.0 million at December 31, 1997.
-12-
Other Issues
Information Systems for the Year 2000
The Company is investigating the extent to which its
currently installed information technology and non-information
technology systems, and those of third parties with whom the
Company conducts business, will be affected by what is commonly
known as the "Year 2000" problem. The Company has reviewed its
Year 2000 issues and expects to complete its modifications by
July 1999. Additionally, the Company in the process of receiving
written assurances from the majority of its providers as to their
progress in addressing Year 2000 issues.
The Company estimates that costs incident to Year 2000
compliance will not exceed $100,000, of which, less than $1,000
has been incurred through September 30, 1999. Based on
information known at this time, the Company does not believe that
Year 2000 compliance will have a material adverse effect on the
its financial condition, operations or cash flows. No assurance
can be given, however, that all of the Company's systems or those
of third parties with whom the Company conducts business will be
Year 2000 compliant, that compliance costs will not exceed
expected amounts or that the impact of any failure by the Company
or any such third party to achieve Year 2000 compliance will not
have a material adverse effect on the Company. Once the effects
of Year 2000 have been fully assessed, the Company intends to
develop and complete a contingency plan by September 1999 in
order to address significant risks and uncertainties.
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.
-13-
PART II Other information
Item 5. Shareholder Proposals
Any shareholder who, in accordance with and subject to the
provisions of the proxy rules of the Securities and Exchange
commission, wishes to submit a proposal for inclusion in the
Company's proxy statement for its 1999 Annual meeting of
Shareholders must deliver such proposal in writing to the
Company's Secretary at the Company's principal executive offices
at One Radnor Corporate Center, Suite 200, 100 Matsonford Road,
Radnor, Pennsylvania 19087, not later than November 27, 1998.
Pursuant to new amendments to Rule 14a-4(c) of the
Securities Exchange Act of 1934, as amended, and the Company's
By-laws, if a shareholder who intends to present a proposal at
the 1999 Annual Meeting of Shareholders does not notify the
Company of such proposal on or prior to the earlier of 90 days
prior to the date of the 1999 Annual Meeting or February 3,1999,
then management proxies will be permitted to use their
discretionary authority to vote on the proposal when the proposal
is raised at the 1999 Annual Meeting of Shareholders, even though
there is no discussion of the proposal in the 1999 proxy
statement.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
(27) Financial Data Schedule, filed herewith.
(b) Reports on Form 8-K
No reports on Form 8-K were filed for the quarter ended
September 30, 1998.
-14-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, as amended, the Registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly
authorized.
PENN VIRGINIA CORPORATION
Date: November 13, 1998 By: /s/ Steven W. Tholen
----------------- --------------------------------
Steven W. Tholen, Vice President
and Chief Financial Officer
Date: November 13, 1998 By: /s/ Ann N. Horton
----------------- --------------------------------
Ann N. Horton, Controller
and Principal Accounting Officer
PENN VIRGINIA CORPORATION
INDEX
PAGE
PART I Financial Information:
Item 1. Financial Statements
Condensed Consolidated Statements of Income for 1
the three and six months ended June 30, 1998 and 1997
Condensed Consolidated Balance Sheets as of 2
June 30, 1998 and December 31, 1997
Condensed Consolidated Statements of Cash Flows 4
for the three and six months ended June 30, 1998 and 1997
Notes to Condensed Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of 7
Financial Condition and Results of Operations
PART II Other Information
Item 5. Shareholder Proposals 14
Item 6. Exhibits and Reports on Form 8-K 14