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 leasing of coal mineral rights and the collection of related royalties; the exploration, development and production of oil and natural gas and the collection of royalties and overrides on various oil and gas properties.
The Company owns the mineral rights to approximately 358 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.
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 454,000 barrels of oil and condensate and 175 billion cubic feet of natural gas at December 31, 1996.
GOALS AND STRATEGY
Penn Virginia's primary goal is to maximize its long-term, intrinsic value per share. The Company believes growth in intrinsic value per share will ultimately be reflected in the price of its stock.
Penn Virginia's coal and land strategy is to manage coal production from its properties for the long-term by leasing its 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 long-term oil and gas strategy is to add to its base of proved reserves and to increase shareholder value. This will be accomplished through a combination of low-risk development drilling, moderate-risk exploratory drilling and property acquisitions. The Company is targeting acquisition candidates with significant development opportunities and/or the potential to consolidate operations, reduce operating costs per unit of production and accelerate cash flow.
Penn Virginia's investment strategy is to continue to prudently manage its holdings to support the growth of the other business segments.
FINANCIAL INFORMATION
The Company operates in two primary business segments: (1) coal and land and (2) oil and gas. Financial information concerning the Company's business segments can be found in Note 13 (Segment Information) of the Notes to the Consolidated Financial Statements of Penn Virginia Corporation which is included in this report.
COAL AND LAND OPERATIONS
OVERVIEW
Penn Virginia owned approximately 123,000 acres of coal, timber and natural gas bearing land in Virginia, West Virginia and Kentucky at December 31, 1996.
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 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 209 million board feet of standing saw timber.
COAL PRODUCTION
Various operators mined 3.4 million tons of coal from Penn Virginia's properties in 1996 and paid an average royalty rate of $2.07 per ton compared with 4.1 million tons mined in 1995 at an average royalty rate of $2.21 per ton.
WEST VIRGINIA
In July 1996, the Company purchased a 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. Simultaneous with the acquisition the Company entered into a long-term lease with the seller for the mining of the coal reserves. The seller expects coal production to begin from the property in late 1997 or early 1998.
In January 1996, the Company entered into three lease agreements with an operator covering approximately 60 million tons of its coal reserves in West Virginia. The leases have a fifteen-year initial term with an option to renew for an additional five-year term. The operator is obtaining operating permits on the property and is expected to begin production in 1997.
During 1996, operators mined 1,094,000 tons of coal in West Virginia and paid an average royalty rate of $2.20 per ton compared with 868,000 tons in 1995 and at an average royalty rate of $2.51 per ton.
VIRGINIA
In May 1996, the Company restructured a lease with Westmoreland Coal Company in which the Company regained the lease rights to its Virginia reserves. The Company has leased approximately 90 percent of the 115 million tons relinquished in this transaction. Production from these reserves began in late 1996 and is expected to increase throughout 1997 as operators receive permits and begin operations.
During 1996, operators mined 2,287,000 tons of coal in Virginia and paid an average royalty rate of $2.01 per ton compared with 3,273,000 tons of coal in 1995 at an average royalty rate of $2.12 per ton.
In January 1997, the Company acquired a property 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. Production from the property is on-going at an annual rate of approximately 1.2 million tons.
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 is anticipated to begin in 1998.
TIMBER PRODUCTION
The Company harvested and sold 4.0 million board feet for $183 per Mbf in 1996 compared with 3.2 million board feet for $158 per Mbf in 1995. 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 0.5 million board feet in 1996.
The Company's timber resources are managed 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 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.
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, 1996, the Company had approximately 178.2 Bcfe of proved reserves (175.4 Bcf of natural gas) including 162.8 Bcfe of working interests and 15.4 Bcfe of royalty interests.
PRODUCTION
During 1996, 47,000 barrels of oil and condensate and 7.5 Bcf of natural gas, net to the Company's interest, were produced compared with 58,000 barrels and 7.2 Bcf in 1995. Prices received by the Company were $18.43 and $14.24 per barrel and $2.84 and $1.85 per Mcf for oil and gas in 1996 and 1995, respectively.
EXPLORATION AND DEVELOPMENT
The Company drilled 48.5 net wells in 1996 of which 38.3 were development and 10.2 were exploratory. A total of 1.1 net wells were dry holes. The successful development wells added approximately 12.8 Bcfe of proved developed reserves. The exploratory wells were drilled primarily on a 50,000 acre leasehold prospect in southern West Virginia accumulated by the Company over the last five years. The Company intends to drill fifteen additional wells on this prospect in 1997.
In 1997, the Company intends to drill 40 to 50 development wells and approximately 15 to 20 exploratory wells.
CAPITAL EXPENDITURES
The 1997 oil and gas segment capital expenditure budget, including producing property acquisitions, is approximately $16.2 million. The capital expenditures are expected to be funded by a combination of internally generated cash flow and additional debt.
Management continually reviews the Company's capital expenditure program and may increase, decrease or reallocate amounts based on industry conditions.
TRANSPORTATION
The Company transports its natural gas to market on various gathering, transmission and pipeline systems owned primarily by third parties.
Forty-five percent of the Company's natural gas is gathered by Consolidated Natural Gas (CNG) and the Columbia Gas System (Columbia) in southern West Virginia. The Federal Energy Regulatory Commission (FERC) is reviewing a rate case submitted by CNG that would increase interruptible gathering rates from 14.4 cents to 15.4 cents per MMBtu effective February 1, 1997. Columbia has also requested through FERC filings that its interruptible gathering rates be increased from 15.49 cents to
25.00 cents per MMBtu and its fuel retention charge be increased from 0.64 percent to 0.87 percent of volume throughput effective February 1, 1997. In addition, Columbia is expected to transfer its gathering system assets to a subsidiary Columbia Natural Resources (CNR) in 1997 at the same pending gathering rates with a 1 percent maximum retainage fee. The action is currently pending FERC approval.
Approximately sixty percent of the Company's natural gas production is transported to market on Columbia transmission and gathering pipelines. Currently, the Company has limited pipeline transportation flexibility. Production can be adversely affected by major, long-term shutdowns of the Columbia pipeline for maintenance or replacement. The Company is negotiating with CNG to obtain additional capacity and thereby increase pipeline transportation flexibility.
MARKETING
Penn Virginia sold its natural gas on the spot market or through short-term contracts to industrial and marketing companies in 1996. In February 1996, the Company sold approximately 5,525 MMBtu of natural gas per day, net to its interest, to various customers through fixed-price contracts for delivery during the period from April 1996 through March 1997. The Company entered into short-term sales contracts in November 1996 for the delivery of approximately 5,100 MMBtu per day from December 1996 through March 1997. In December, the Company sold approximately 2,550 MMBtu per day for the period February 1997 through December 1997. In January 1997 the Company sold approximately 8,500 MMBtu per day to various customers for delivery during the period from April 1997 to October 1997.
The Company may use additional fixed price contracts and/or commodity derivative contracts to reduce the risk caused by fluctuations in the price of natural gas. During 1996, the Company did not use any commodity derivative contracts.
INVESTMENTS
The Company holds equity investments in Norfolk Southern Corporation, Westmoreland Coal Company and Blue Diamond Coal Company. See Note 12 (Investments and Other Income) of the Notes to the Consolidated Financial Statements for additional information.
In September 1996, the Company sold its sixteen percent interest in Westmoreland Resources, Inc., a joint venture which operates a Montana coal mine, to Westmoreland Coal Company. Westmoreland Coal Company exercised an option received in conjunction with the Virginia 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 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.
In the fourth quarter of 1996, Penn Virginia sold 598,600 shares of its Westmoreland Coal Company common stock to various purchasers. In December 1996, Westmoreland Coal Company filed Chapter 11, therefore Penn Virginia wrote down its investment in the remaining 755,811 shares held at year end. The sale of this stock and subsequent write-down of the remaining 755,811 shares held at year end resulted in a $3.3 million pretax charge to earnings.
The fair value of the Company's equity portfolio at December 31, 1996 was $97.4 million compared with $96.6 million at December 31,1995.
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.
ESTIMATES OF RESERVES AND FUTURE NET REVENUES
Numerous uncertainties exist in estimating quantities of coal and oil and gas reserves and future net revenues therefrom. The estimates set forth in this report are based on various assumptions, which may ultimately prove to be inaccurate.
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, 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 economically.
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 1997 and future years will increase compared with previous years. Consequently, it is likely the Company will experience increased levels of exploration expense in 1997 and future years.
INVESTMENTS
The value of the Company's investment portfolio is subject to market price fluctuations and the ability to find a willing buyer for equity investments.
EMPLOYEES
Penn Virginia had 60 employees at December 31, 1996. 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. Keith Horton and Ann Horton are husband and wife. No other family relationships exist among the executive officers. Each officer is elected annually by the Board of Directors and serves at the pleasure of the Board of Directors.
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.
Ann N. Horton - Ms. Horton is the Controller. She has served in various capacities with the Company since 1981, most recently as Vice President, Finance and Administration at the Company's oil and gas subsidiary.
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 subsidiary. He has served in various capacities with the Company since 1981. Mr. Horton serves as Vice Chairman of the Central Appalachian Section of the Society of Mining Engineers. He also serves as a director of the Virginia Mining Association and the Powell River Project.
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
ITEM 2 - PROPERTIES
COAL AND LAND
Penn Virginia's coal reserves and timber assets at December 31, 1996 were 123,000 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 358 million tons as of December 31, 1996. 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 that 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 209 million board feet of standing saw timber.
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, 1996, 1995, 1994.
PROVED RESERVES
Penn Virginia had proved reserves of 454,000 barrels of crude oil and condensate and 175 Bcf of natural gas at December 31, 1996. The present value of the estimated future cash flows before income tax discounted at 10 percent (SEC PV10 Value) was $186 million. At December 31, 1996, the Company had 331 gross (206 net) proved undeveloped drilling locations.
The average prices used to determine proved reserves at December 31, 1996, 1995 and 1994 were ($/Bbl) $23.25, $16.02 and $15.00, respectively for oil and condensate and ($/Mcf) $3.74, $2.67 and $2.09, respectively for natural gas. Such prices were prices in effect as of year end 1996 and may not be indicative of future sales prices received.
Since January 1, 1996, 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 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.
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.
PRODUCTIVE WELLS
The number of productive oil and gas wells in which Penn Virginia had an interest at December 31, 1996 is set forth below. Productive wells are producing wells or wells capable of commercial production.
ITEM 3
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
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the entire year of 1996.
PART II
ITEM 5
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:
The Company's common stock is traded on NASDAQ under the symbol PVIR.
ITEM 6
ITEM 6 - SELECTED FINANCIAL DATA
FIVE YEAR SELECTED FINANCIAL DATA
SUMMARIZED QUARTERLY FINANCIAL DATA
Quarterly financial data for 1996 and 1995 were as follows:
(a) Includes the Columbia Gas settlement of $11.4 million. (b) Includes the impairment of oil and gas properties totaling $10.9 million. (c) The sum of the quarters may not equal the total of the respective year's net income per share due to changes in the weighted average shares outstanding throughout the year.
ITEM 7
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 completed several important steps in 1996 which are expected to provide the basis for future growth in earnings and cash flow.
In January 1996, the Company signed a series of lease agreements on its coal reserves in West Virginia covering approximately 60 million tons of coal.
In May 1996, the Company restructured a lease with Westmoreland Coal Company ("Westmoreland"), whereby Penn Virginia regained control of its Virginia coal reserves previously leased to Westmoreland for approximately $10.7 million plus other considerations. Westmoreland retained a lease of certain Virginia reserves. During the course of 1996 and early 1997, approximately 90 percent of the 115 million tons regained from this transaction were leased to new operators.
In July 1996, Penn Virginia acquired a coal and timber property in West Virginia for approximately $8.0 million. This acquisition included 15,000 acres holding an estimated 17 million tons of high BTU coal reserves and 22 million board feet of standing hardwood timber. This property has been leased to the seller and production is expected to begin in late 1997 or early 1998.
During 1996, the Company continued to drill and develop its oil and gas properties. Penn Virginia drilled 48.5 natural gas wells. The Company also acquired over 16,000 acres of oil and gas leases or properties contiguous with or near its current properties.
In August 1996, the Company entered into a $50.0 million senior unsecured revolving credit facility with a group of banks. This facility will allow Penn Virginia to continue its growth strategy into the future.
Continuing its growth strategy, the Company made two coal acquisitions in early 1997.
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. Production from the property is ongoing at an annual rate of approximately 1.2 million tons.
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. First production from the property is anticipated to begin in 1998.
RESULTS OF OPERATIONS
CONSOLIDATED NET INCOME
Penn Virginia's 1996 net income was $13.0 million compared with $10.1 million in 1995 and $13.5 million in 1994. Income from operations before income taxes in 1996 includes a $3.3 million loss on the Company's investment in Westmoreland Coal Company common stock.
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 121) and a $1.5 million loss related to the sale of nonstrategic oil and gas properties.
Net income for 1994 includes a pretax charge of $1.8 million for the impairment of oil and gas properties and the benefit of a $3.5 million adjustment related to the prior years' provision for deferred taxes.
SELECTED FINANCIAL DATA
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
Operating income for the coal and land segment was $5.7 million in 1996 compared with $7.5 million in 1995 and $13.4 million in 1994. The decrease in 1996 is mainly the result of Westmoreland Coal Company's suspension of its mining operations in Virginia on July 31, 1995. The suspension substantially reduced production of the Company's coal reserves. In May 1996, the Company restructured a lease with Westmoreland Coal Company in which Penn Virginia regained control of its Virginia coal
reserves previously leased to Westmoreland. The Company has been successful in leasing the reserves to new operators and limited production began in late 1996 and is expected to increase throughout the next two to three years.
Coal royalty revenues decreased from $14.8 million in 1994 to $9.1 million in 1995 which was related to the cessation of mining on the Westmoreland Coal Company Virginia lease.
The Company expects coal production from its properties to increase in 1997 due to the expected startup of production by operators on its West Virginia and Virginia properties and production from the coal reserve acquisition completed in January 1997.
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
The oil and gas segment had operating income of $8.3 million in 1996 compared with an operating loss of $0.3 million in 1995 and an operating loss of $1.3 million in 1994. Revenues for 1996 were $2.9 million lower compared with 1995 due to the $11.4 million received in 1995 on the natural gas
sales contract settlement with Columbia Gas offset, in part, by increased revenues from natural gas sales of $7.0 million in 1996 compared with 1995. Natural gas prices were the primary factor for this increase. The Company received an average of $2.84 per Mcf for its working interest natural gas in 1996 compared with an average of $1.85 per Mcf in 1995.
Operating expenses increased $0.4 million in 1996 compared with 1995. Decreases in general and administrative expenses were offset by increases in taxes other than income due to the increase in production taxes related to sales revenue.
Depreciation, depletion and amortization expense decreased $1.0 million in 1996 compared with 1995. The depletion rates were affected by the write-down of oil and gas properties as a result of the implementation of SFAS 121 in 1995. The impairment resulted from a property purchased in 1981 subject to a high-priced, take or pay natural gas sales contract which was later abrogated by Columbia Gas.
Revenues increased $10.5 million in 1995 compared with 1994 due to the $11.4 million natural gas sales contract settlement with Columbia Gas.
Expenses increased $9.6 million in 1995 compared with 1994, primarily as a result of the implementation of SFAS 121 in 1995.
INVESTMENTS
Penn Virginia's investments consist primarily of shares held in Norfolk Southern Corporation.
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.
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, therefore Penn Virginia wrote down its investment in the remaining 755,811 shares held at year end.
CAPITAL RESOURCES AND LIQUIDITY
CASH FLOW FROM OPERATING ACTIVITIES
Net cash provided from operating activities was $18.5 million in 1996 compared with $19.6 million in 1995 which included $11.4 million from the settlement of a natural gas contract dispute, compared with $15.6 million in 1994.
The $4.0 million increase in 1995 compared with 1994 primarily reflects the $11.4 million settlement of the natural gas contract dispute, offset in part by lower net income and a $2.7 million reduction in the change in operating assets and liabilities.
CASH FLOW FROM INVESTING ACTIVITIES
Penn Virginia used $18.7 million in the coal segment related to acquisitions in 1996. Lease acquisition costs related to the reserve relinquishment by Westmoreland Coal Company were $10.7 million. The Company purchased a coal property in July 1996 for approximately $8.0 million. This compares with $3.3 million spent on coal lease acquisitions in 1995. Penn Virginia used $9.5 million to fund its oil and gas drilling program in 1996. This is an increase in 1996 of $4.1 million compared with development costs in 1995 of $5.4 million. Penn Virginia used $0.3 million in 1996 to acquire oil and gas properties compared with $17.0 million in 1995.
CASH FLOW FROM FINANCING ACTIVITIES
Net cash provided (used) by financing activities was $0.4 million compared with ($9.8) million in 1995 and ($15.6) million in 1994.
WORKING CAPITAL
At December 31, 1996, Penn Virginia had working capital of $0.7 million. In addition, Penn Virginia had debt capacity of $31.7 million 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.
CAPITAL EXPENDITURES
Capital and exploration expenditures for the Company are detailed below.
Capital expenditures for the coal and land business segment were $20.6 million in 1996. The expenditures include $10.7 million paid to Westmoreland Coal Company for the relinquishment of coal reserves in Virginia and $8.0 million for the acquisition of additional coal reserves in West Virginia.
Development drilling expenditures for the oil and gas segment were $7.3 million in 1996 compared with $5.4 million in 1995. The Company drilled 37.3 successful development wells, 10.1 exploratory wells and 1.1 net dry holes in 1996 compared with 23.5 net successful development wells and 1.0 net dry hole in 1995. Unproved property lease acquisition costs were $0.2 million compared with $0.1 million in 1995.
Capital expenditures before lease and proved property acquisitions for 1997 are expected to be $16 to $18 million including $0.2 million to $0.5 million for the coal and land segment and $16 to $17 million for oil and gas. The Company plans to drill approximately 40 to 50 development wells and 15 to 20 exploratory wells. Management continually reviews the Company's drilling expenditures and may increase, decrease or reallocate amounts based on industry conditions.
Management believes its cash flow from operations, portfolio of investments and sources of debt financing are sufficient to fund its 1997 planned capital expenditure program.
In early 1997, the Company acquired two coal properties for approximately $8.9 million. The acquisition 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.
CHANGE IN ACCOUNTING PRINCIPLES
In October 1996, the American Institute of Certified Public Accountants issued Statement of Position 96-1, "Environmental Remediation Liabilities," which establishes new accounting and reporting
standards for the recognition and disclosure of environmental remediation liabilities. The provisions of the statement are effective for fiscal years beginning after December 15, 1996. The impact of this new standard is not expected to have a significant effect on the Company's financial position or results of operations.
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 that its environmental risks are materially different from those of comparable companies or that the 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, 1996, the Company has provided for approximately $50,000 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 land owner. 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 26, 1997 By: /s/ STEVEN W. THOLEN -------------------------------------- (Steven W. Tholen, Vice President and Chief Financial 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.
ITEM 8
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PENN VIRGINIA CORPORATION AND SUBSIDIARIES
Index to Financial Section
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Penn Virginia Corporation:
We have audited the accompanying balance sheet of Penn Virginia Corporation (a Virginia corporation) and subsidiaries as of December 31, 1996, and the related consolidated statements of income, shareholders' equity and cash flows for the year 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 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 financial position of Penn Virginia Corporation and subsidiaries as of December 31, 1996, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP ------------------------- Arthur Andersen LLP
Houston, Texas February 11, 1997
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders Penn Virginia Corporation
We have audited the balance sheet of Penn Virginia Corporation and subsidiaries as of December 31, 1995, and the related consolidated statements of income, shareholders' equity and cash flows for each of the years in the two-year period then ended. 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 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 misstatement. 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of Penn Virginia Corporation and subsidiaries as of December 31, 1995, and the results of their operations and their cash flows for each of the years in the two-year period then ended, 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."
/s/ KPMG PEAT MARWICK LLP --------------------------- 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.
/s/ A. JAMES DEARLOVE /s/ STEVEN W. THOLEN - --------------------------- ----------------------------- 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
The accompanying notes are an integral part of these consolidated financial statements.
PENN VIRGINIA CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these consolidated financial statements.
PENN VIRGINIA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
The accompanying notes are an integral part of these consolidated financial statements.
PENN VIRGINIA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ACTIVITY
Penn Virginia Corporation ("Penn Virginia" or the "Company") is an Appalachia energy company. 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.
Penn Virginia explores for, develops and produces crude oil, condensate and natural gas in western Virginia, southern West Virginia and eastern Kentucky.
CONSOLIDATION
The consolidated financial statements include the accounts of Penn Virginia Corporation and all wholly-owned subsidiaries. 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.
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, 1996, the Company had notes receivable of $7.2 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 charged to 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 121), Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of. SFAS 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 121, the Company reviewed 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 was recognized. Fair value, on a depletable unit basis, was 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.
Prior to 1995, the Company assessed impairment for its proved properties by comparing the aggregate carrying value of its proved properties with the undiscounted future net cash flows from proved reserves, determined in accordance with Securities and Exchange Commission regulations.
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of financial instruments approximates fair value. The Company's financial instruments are accounts receivable, accounts payable and long-term debt. The Company does not have any off-balance sheet financial instruments or derivatives.
OIL AND GAS REVENUES
Oil and gas revenues generally are recorded using the entitlement method. The Company recognizes oil and gas revenues based on the amount of oil and gas sold to purchasers on its behalf. As of December 31, 1996, the Company did not have any material oil or 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 109") Accounting for Income Taxes. SFAS 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.
PER SHARE DATA
Per share data is based on the weighted average number of shares outstanding during the year. Options are considered to be common stock equivalents and, to the extent appropriate, have been added to the weighted average common shares outstanding.
2. INVESTMENTS AND OTHER INCOME. The cost, gross unrealized holding gains (losses) and fair value of available-for-sale securities were as follows:
Related dividend income is as follows:
The Company owned 1,102,400 shares of Norfolk Southern Corporation stock at December 31, 1996 and 1995. The Company owned 755,811 and 1,754,411 shares of Westmoreland Coal Company's common stock at December 31, 1996 and at December 31, 1995 respectively
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, therefore Penn Virginia wrote down its investment in the remaining 755,811 shares held at year end. In September 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 provided part of the life and medical benefits coverage for eligible retired employees of Penn Virginia.
3. NOTES RECEIVABLE
Current maturities of notes receivable are as follows:
Interest income included in other income amount to $5.1 million, $0.9 million and $1.3 million in 1996, 1995 and 1994 respectively. Included in 1996, 1995 and 1994 interest income was $4.7 million, $0.8 million and $1.0 million respectively, relating to notes receivable on the sale of coal-in-place.
4. 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 Gas 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.
5. PROPERTY, PLANT, AND EQUIPMENT
Property, plant and equipment includes:
In May 1996, Westmoreland Coal Company relinquished its rights to an estimated 115 million tons of Penn Virginia's coal reserves located in Virginia for $10.7 million and other considerations.
In July 1996, the Company acquired a coal and timber property in West Virginia for $8.0 million. This acquisition included 15,000 acres holding an estimated 17 million tons of coal and 22 million board feet of timber.
During 1996, the Company drilled natural gas wells and made three producing property acquisitions in the oil and gas segment. These capital expenditures amounted to approximately $10.0 million.
6. LONG-TERM DEBT
Long-term debt is summarized in the following table.
Maturities of debt:
REVOLVING CREDIT
During 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 2000.
The Revolver bears interest at LIBOR plus a percentage based on the borrowing utilized. The financial covenants require the Company to maintain certain levels of net worth, debt to capitalization and dividend limitation requirements among other restrictions. At December 31, 1996, the Company was in compliance with all of its covenants.
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.
Aggregate installments of the senior debt maturing in 1997 and 1998 amount to $2,000,000 and $2,000,000, respectively.
TERM LOAN
The Company had one unsecured term loan outstanding at December 31, 1996. This note relates to an oil and gas acquisition in 1994. The note is non-interest bearing and the maturity date is September 13, 2014; an imputed interest rate of 7.75 percent is being used. The note balance is $954,000 at December 31, 1996 and $496,000 was included in the 1995 balance in other liabilities.
7. ACCRUED EXPENSES
Accrued expenses are summarized in the following table.
8. INCOME TAXES
The provision (benefit) for income taxes from continuing operations is comprised of the following:
The difference between the reported income tax expense (benefit) and income tax expense (benefit) computed by multiplying income from continuing operations before income taxes by the federal statutory income tax rate is as follows:
The Company's federal income tax returns for the 1984 through 1986 tax years were examined by the Internal Revenue Service. As a result of the favorable settlement of various issues raised during the Internal Revenue Service examination, the Company recognized a $3.5 million adjustment to its prior year provision for deferred taxes in 1994.
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 relate to the following:
As of December 31, 1996, the Company had available for federal income tax purposes, alternative minimum tax credits of approximately $4.6 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 $5.2 million at December 31, 1996 which expire between the years 2009 and 2011.
The Company has a carryforward of excess contributions to a funded postretirement benefit plan of approximately $1.2 million at December 31, 1996. The excess contributions can be carried forward indefinitely.
9. 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 $527,000, $457,000 and $971,000 in 1996, 1995 and 1994, 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. 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 1996, 1995 and 1994 consist of the following components:
The following sets forth the funded status of the plans:
The weighted-average discount rate used to measure the projected benefit obligations is 7.25 percent. The long-term rate of return on assets is 9.50 percent.
10. 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 1996 and 1995 includes the following components:
The following sets forth the funded status of the plan:
For measurement purposes, the following rates were assumed: medical trend of 9.5 percent reducing to 5.5 percent by 2004, 7.25 percent discount rate and a 3.0 percent net return on assets.
11. OTHER LIABILITIES
The oil and gas segment had operating income of $8.3 million in 1996 compared with an operating loss of $0.3 million in 1995 and Other liabilities are summarized in the following table:
12. 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, 1996 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 686,750 options that were granted under the Plans, 308,800 options have been exercised, forfeited or have expired. At December 31, 1996, options totaling 377,950 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 20,000 options and one for 10,000 options, expired in 1996. A third grant was made in 1994 for 20,000 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, 1996, the 20,000 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:
The following table summarizes certain information regarding stock options outstanding at December 31, 1996:
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. Accordingly, no compensation expense has been recognized for awards granted under these 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, 1996 and 1995, would have been as follows:
The fair value of the options granted during 1995 and 1996 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-5.45 percent b) expected volatility of 40.21 percent-41.17 percent, c) risk-free interest rate of 5.70 percent-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"). 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.
13. SEGMENT INFORMATION
Penn Virginia's operations are classified into two business segments:
Coal and Land - the leasing of mineral rights and subsequent collection of royalties and the development and harvesting of timber. Oil and Gas - crude oil and natural gas exploration, development and production.
Operating income is total revenue less operating expenses. Operating income does not include certain other income items, gain (loss) on sale of assets, 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.
14. COMMITMENTS AND CONTINGENCIES
RENTAL COMMITMENTS
Minimum rental commitments under all non-cancelable operating leases, primarily real estate, in effect at December 31, 1996 were:
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.
15. CONCENTRATION OF CREDIT RISK
At December 31, 1996 the Company had notes receivable with face values of $33.4 million and unamortized discount of $26.2 million for a net carrying value of $7.2 million due from three purchasers of coal reserves. The notes are secured by the assets purchased and are being repaid from the cash flow from the sale of production.
16. SUBSEQUENT EVENTS
In early 1997, the Company sold an additional 750,000 shares of Westmoreland Coal Company common stock. Penn Virginia has 5,811 shares remaining as a result of the sale.
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. Production from the property is ongoing at an annual rate of approximately 1.2 million tons. The purchase price of this property was approximately $7.0 million.
In February 1997, Penn Virginia acquired approximately 7.5 million tons of recoverable coal 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. The purchase price of this property was approximately $1.9 million.
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 Statement of Financial Accounting Standards No. 69. 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
COSTS INCURRED IN CERTAIN OIL AND GAS ACTIVITIES
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.
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, 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 and 1994 were estimated by Williamson.
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. All reserves are located in the United States.
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:
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. Gas prices were escalated only where existing contracts contained fixed and determinable escalation clauses. Contractually provided 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.
CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
Natural gas prices have declined significantly since December 31, 1996. Accordingly, the discounted future net cash flows would be reduced if the standardized measure was calculated in the first quarter of 1997.
ITEM 9
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, 1995, or the subsequent interim periods preceding KPMG Peat Marwick LLP's dismissal.
46.01 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
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 24 of this report.
(b) Exhibits (3.1) Amended and restated articles of incorporation of the Company (incorporated by reference to Exhibit 4 (a) 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)). (3.2) Amended bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1995 (Commission File No. 0-753)). (4.1) 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 for the quarter ended September 30, 1996 (Commission File No. 0-753)). (4.2) 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. (10.1) 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)). (10.2) 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)). (10.3) 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 13, 1982 ( Registration No. 2-77500)). (10.4) 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)). (10.5) 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)). (10.6) 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. (10.7) 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)). (10.8) 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)).
(16) Letter re: Change in Certifying Accountant (incorporated by reference to Exhibit 16.1 to Amendment No. 1 to the Company's Current Report on Form 8-K/A filed on September 6, 1996 (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 (c) Reports on Form 8-K: Registrant did not file a Current Report on Form 8-K during the fiscal quarter ended December 31, 1996