Item 1. Financial Statements
PENN VIRGINIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME - Unaudited
(in thousands, except per share data)
Three Months
Ended March 31,
2004 2003
Revenues
Natural gas $ 33,964 $ 30,000
Oil and condensate 3,488 4,313
Coal royalties 16,860 11,451
Timber 153 556
Other 1,161 1,696
Total revenues 55,626 48,016
Expenses
Lease operating 4,844 3,591
Exploration 5,560 4,250
Taxes other than income 3,030 3,073
General and administrative 5,682 5,941
Depreciation, depletion and amortization 14,156 12,348
Total expenses 33,272 29,203
Operating income 22,354 18,813
Other income (expense):
Interest expense (1,390) (936)
Interest and other income 274 439
Income before minority interest, income taxes and cumulative effect of change in accounting principle 21,238 18,316
Minority interest 4,503 3,019
Income tax expense 6,593 6,174
Income before cumulative effect of a change in accounting principle 10,142 9,123
Cumulative effect of change in accounting principle - 1,363
Net income $ 10,142 $ 10,486
Income before cumulative effect of a change in accounting principle, basic $ 1.12 $ 1.02
Cumulative effect of change in accounting principle, basic - 0.15
Net Income per share, basic $ 1.12 $ 1.17
Income before cumulative effect of a change in accounting principle, diluted $ 1.11 $ 1.01
Cumulative effect of change in accounting principle, diluted - 0.15
Net Income per share, diluted $ 1.11 $ 1.16
Weighted average shares outstanding, basic 9,084 8,952
Weighted average shares outstanding, diluted 9,176 8,996
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The accompanying notes are an integral part of these consolidated financial
statements.
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PENN VIRGINIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
March 31, December 31,
2004 2003
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents $ 13,026 $ 18,008
Accounts receivable 27,816 31,789
Other 6,460 2,108
Total current assets 47,302 51,905
Property and equipment
Oil and gas properties (successful efforts method) 517,897 503,290
Other property and equipment 268,841 267,378
Less: Accumulated depreciation, depletion and amortization (163,663) (149,734)
Net property and equipment 623,075 620,934
Other assets 10,289 10,894
Total assets $ 680,666 $ 683,733
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt $ 3,000 $ 1,500
Accounts payable 656 9,911
Accrued liabilities 16,774 19,153
Hedging liabilities 4,477 2,678
Taxes on income 3,038 -
Total current liabilities 27,945 33,242
Other liabilities 16,367 15,188
Hedging liabilities 333 998
Deferred income taxes 79,734 77,863
Long-term debt of the Company 55,000 64,000
Long-term debt of PVR 89,487 90,286
Minority interest in PVR 190,743 190,508
Shareholders' equity
Preferred stock of $100 par value-authorized 100,000 shares; none issued - -
Common stock of $6.25 par value-16,000,000 shares authorized; 9,114,394
and 9,052,416 shares issued at March 31, 2004 and December 31, 2003,
respectively 56,964 56,576
Paid-in capital 16,951 14,497
Retained earnings 151,710 143,619
Accumulated other comprehensive income (3,493) (2,250)
222,132 212,442
Less: Unearned compensation and ESOP (1,075) (794)
Total shareholders' equity 221,057 211,648
Total liabilities and shareholders' equity $ 680,666 $ 683,733
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The accompanying notes are an integral part of these consolidated financial
statements.
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PENN VIRGINIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - Unaudited
(in thousands)
Three Months
Ended March 31,
2004 2003
Cash flow from operating activities:
Net Income $ 10,142 $ 10,486
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion, and amortization 14,156 12,348
Minority interest 4,503 3,019
Deferred income taxes 2,541 2,637
Dry hole and unproved leasehold expense 1,682 528
Cumulative effect of change in accounting principle - (1,363)
Other 1,050 506
Changes in operating assets and liabilities:
Accounts receivable 3,973 (12,372)
Other current assets (4,355) (495)
Accounts payable and accrued expenses (10,277) 3,326
Other assets and liabilities 1,129 213
Net cash flows provided by operating activities 24,544 18,833
Cash flows from investing activities:
Additions to property and equipment (15,515) (49,497)
Other 528 166
Net cash flows used in investing activities (14,987) (49,331)
Cash flows from financing activities
Dividends paid (2,051) (2,013)
Distributions paid to minority interest holders of PVR (5,428) (3,924)
Proceeds from borrowings of the Company - 32,000
Repayments of borrowings of the Company (9,000) (52)
Proceeds from PVR borrowings - 90,000
Repayments of PVR borrowings - (88,387)
Payments for debt issuance costs - (1,419)
Issuance of stock 1,940 481
Net cash flows provided by (used in) financing activities (14,539) 26,686
Net decrease in cash and cash equivalents (4,982) (3,812)
Cash and cash equivalents-beginning of period 18,008 13,341
Cash and cash equivalents-end of period $ 13,026 $ 9,529
Supplemental disclosures:
Cash paid during the quarter for:
Interest (net of amounts capitalized) $ 2,859 $ 774
Income taxes $ 307 $ 84
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Noncash investing and financing activities:
Issuance of PVR units for acquisition $ 1,060 $
The accompanying notes are an integral part of these consolidated financial
statements.
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PENN VIRGINIA CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Unaudited
March 31, 2004
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of Penn Virginia Corporation (Penn Virginia, the Company, we or our),
all wholly-owned subsidiaries of the Company, and Penn Virginia Resource
Partners, L.P. (the Partnership or PVR) of which we indirectly own the two
percent general partner interest and approximately 42.5 percent limited partner
interest. Penn Virginia Resource GP, LLC, an indirect wholly-owned subsidiary of
Penn Virginia, serves as the Partnership's sole general partner. The financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States of America for interim financial reporting and
Securities and Exchange Commission (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 our consolidated financial statements and
footnotes included in our Annual Report on Form 10-K for the year ended December
31, 2003. Our accounting policies are consistent with those described in our
Annual Report on Form 10-K for the year ended December 31, 2003, except as
discussed below. Please refer to such Form 10-K for a further discussion of
those policies. Operating results for the three months ended March 31, 2004 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 2004. Certain reclassifications have been made to conform to
the current period's presentation.
2. STOCK-BASED COMPENSATION
Stock-based Compensation
We have stock compensation plans that allow, among other grants,
incentive and nonqualified stock options to be granted to key employees and
officers and nonqualified stock options to be granted to directors. We account
for those plans under the recognition and measurement principles of Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees,
and related Interpretations. No stock-based employee compensation cost related
to stock options is reflected in net income, as all options granted under those
plans had an exercise price equal to the market value of the underlying common
stock on the date of grant. The following table illustrates the effect on net
income and earnings per share as if we had applied the fair value recognition
provision of Statement of Financial Accounting Standard (SFAS) No. 123,
Accounting for Stock-Based Compensation, to stock-based employee options.
Three Months
Ended March 31,
2004 2003
Net income, as reported $ 10,142 $ 10,486
Add: Stock-based employee compensation expense included in reported
net income related to restricted
units and director compensation, net of related tax effects 68 55
Less: Total stock-based employee compensation expense determined
under fair value based method for
all awards, net of related tax effects (237) (278)
Pro forma net income $ 9,973 $ 10,263
Earnings per share
Basic - as reported $ 1.12 $ 1.17
Basic - pro forma $ 1.10 $ 1.15
Diluted - as reported $ 1.11 $ 1.16
Diluted - pro forma $ 1.09 $ 1.14
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3. ASSET RETIREMENT OBLIGATIONS
Effective January 1, 2003, we adopted SFAS No. 143, Accounting for Asset
Retirement Obligations, which addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The Standard applies to legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development or normal use of such assets.
The fair value of a liability for an asset retirement obligation is
recognized in the period in which it is incurred if a reasonable estimate of
fair value can be made. The fair value of the liability is also added to the
carrying amount of the associated asset and is depreciated over the life of the
asset. The liability is accreted at the end of each period through charges to
accretion expense, which is recorded as additional depreciation, depletion and
amortization. If the obligation is settled for other than the carrying amount
of the liability, we will recognize a gain or loss on settlement.
Below is a reconciliation of the beginning and ending aggregate carrying
amount of our asset retirement obligations as of March 31, 2004 (in thousands).
Balance, January 1, 2004 $ 3,389
Liabilities incurred in the current period 81
Liabilities settled in the current period (2)
Accretion expense 53
Balance, March 31, 2004 $ 3,521
4. HEDGING ACTIVITIES
Commodity Cash Flow Hedges
The fair values of our hedging instruments are determined based on third
party forward price quotes for NYMEX Henry Hub gas and West Texas Intermediate
crude oil closing prices as of March 31, 2004. The following table sets forth
our positions as of March 31, 2004:
Time Period Notional Effective Floor Swap Price Fair Value
Quantities /Ceiling Price
(Average
Natural Gas MMbtu per Day) ($ Per MMbtu) ($ Per (in thousands)
MMbtu)
Costless collars
April 1 - April 30, 2004 8,000 $3.50 / $5.00 $ (88)
April 1 - June 30, 2004 7,500 $3.50 / $5.28 (349)
April 1 - July 31, 2004 4,000 $3.72 / $6.97 (23)
April 1 - October 31, 2004 3,000 $4.50 / $6.95 (53)
November 1 - December 31, 2004 6,000 $4.50 / $6.95 (130)
May 1 - November 30, 2004 6,500 $4.00 / $6.87 (227)
July 1 - October 31, 2004 7,000 $4.00 / $5.24 (808)
August 1 - October 31, 2004 4,000 $4.00 / $5.25 (351)
November 2004 5,000 $4.00 / $6.82 (61)
December 2004 11,500 $4.00 / $6.82 (170)
January 2005 11,000 $4.00 / $6.82 (231)
November 1, 2004 - January 31, 2005 2,000 $4.00 / $6.40 (126)
February 1, 2005 - April 30, 2005 14,000 $4.00 / $6.40 (755)
January 1, 2005 - March 31, 2005 3,000 $5.00 / $8.10 (36)
May 1, 2005 - September 30, 2005 8,000 $4.50 / $6.13 (178)
Swaps
April 1 2004 - January 31, 2005 1,349 $4.70 (538)
Crude Oil (Average ($ Per
Bbls per Day) barrel)
Swaps
April 1, 2004 - June 30, 2004 120 $26.58 (129)
April 1, 2004 - December 31, 2004 75 $32.17 (42)
April 1, 2004 - June 30, 2004 300 $30.59 (175)
July 1, 2004 - January 31, 2005 350 $30.59 (173)
April 1, 2004 - January 31, 2005 63 $26.93 (154)
Total $ (4,797)
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Based upon our assessment of our derivative contracts designated as cash
flow hedges at March 31, 2004, we reported (i) a hedging liability of
approximately $4.8 million and (ii) a loss in accumulated other comprehensive
income of $3.1 million, net of a related income tax benefit of $1.7 million. In
connection with monthly settlements, we recognized net hedging losses in natural
gas and oil revenues of $1.2 million for the three months ended March 31, 2004.
Based upon future oil and natural gas prices as of March 31, 2004, $4.5 million
of hedging losses are expected to be realized within the next 12 months. The
amounts ultimately realized will vary due to changes in the fair value of the
open derivative contracts prior to settlement. We recognized net hedging losses
of $4.1 million for the three months ended March 31, 2003.
Interest Rate Swap
In conjunction with its 5.77 percent senior unsecured notes, PVR entered
into an interest rate swap agreement with a notional amount of $30 million to
hedge a portion of the fair value of those notes which mature over a ten year
period. This swap is designated as a fair value hedge and has been reflected as
a decrease of long-term debt of approximately $13 thousand as of March 31, 2004,
with a corresponding increase in long-term hedging liabilities. Under the terms
of the interest rate swap agreement, the counterparty pays PVR a fixed annual
rate of 5.77 percent on a total notional amount of $30 million, and PVR pays the
counterparty a variable rate equal to the floating interest rate which will be
determined semi-annually and will be based on the six month London Interbank
Offering Rate (LIBOR) plus 2.36 percent.
5. LONG-TERM DEBT
At March 31, 2004 and December 31, 2003, long-term debt consisted of the
following (in thousands):
March 31, December 31,
2004 2003
(Unaudited)
Penn Virginia revolving credit facility $ 55,000 $ 64,000
PVR senior unsecured notes* 89,987 89,286
PVR revolving credit facility 2,500 2,500
147,487 155,786
Less: current maturities (3,000) (1,500)
$ 144,487 $ 154,286
* Includes negative fair value adjustments of $13 thousand and
$714 thousand related to interest rate swap designated as a fair value hedge as
of March 31, 2004
and December 31, 2003, respectively.
6. COMMITMENTS AND CONTINGENCIES
Legal
We are involved in various legal proceedings arising in the ordinary course
of business. While the ultimate results of these proceedings cannot be predicted
with certainty, we believe these claims will not have a material effect on our
financial position, liquidity or operations.
Data Licensing Agreement
On November 3, 2003 we entered into an agreement with a provider of
seismic data, whereby we have received a license to access 5,000 square miles of
3-D seismic data over the next two years. We paid $5 million in the first
quarter of 2004 and have a remaining commitment of $4 million to be paid in the
first quarter of 2005.
7. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
In accordance with SFAS No. 132 (revised 2003), Employers' Disclosures
about Pensions and Other Postretirement Benefit, following are disclosures
regarding the net periodic benefit costs recognized and the total amount of
employer contributions.
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The following table provides the components of net periodic benefit costs for
the respective plans for the three months ended March 31, 2004 and 2003 (in
thousands):
Post-retirement
Pension Healthcare
Three Months Ended Three Months Ended
March 31, March 31,
2004 2003 2004 2003
Service cost $ - $ - $ 6 $ 7
Interest cost 37 39 71 84
Amortization of prior service cost 1 2 22 26
Amortization of transitional obligation 1 1 - -
Recognized actuarial (gain) loss 5 4 11 14
Net periodic benefit cost $ 44 $ 46 $110 $131
Contributions paid as of March 31, 2004 were $0.2 million, and we expect
to contribute approximately $0.7 million to our pension and other postretirement
benefit plans during 2004.
8. EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators used in
the calculation of basic and diluted earnings per share (EPS) for the three
months ended March 31, 2004 and 2003 (in thousands, except per share data).
Three Months
Ended March, 31
2004 2003
Income before cumulative effect of change in accounting principle $ 10,142 $ 9,123
Cumulative effect of change in accounting principle - 1,363
Net income $ 10,142 $ 10,486
Weighted average shares, basic 9,084 8,952
Effect of dilutive securities:
Stock options 92 44
Weighted average shares, diluted 9,176 8,996
Income before cumulative effect of change in accounting principle, $ 1.12 $ 1.02
basic
Cumulative effect of change in accounting principle, basic - 0.15
Net income per share, basic $ 1.12 $ 1.17
Income before cumulative effect of change in accounting principle, $ 1.11 $ 1.01
diluted
Cumulative effect of change in accounting principle, diluted - 0.15
Net income per share, diluted $ 1.11 $ 1.16
9. COMPREHENSIVE INCOME
Comprehensive income represents changes in equity during the reporting
period, including net income and charges directly to equity, which are excluded
from net income. For the three month periods ended March 31, 2004 and 2003, the
components of comprehensive income were as follows (in thousands):
Three Months
Ended March 31,
2004 2003
Net income $ 10,142 $ 10,486
Unrealized holding losses on hedging activities, net of tax (2,073) (3,538)
Reclassification adjustment for hedging activities, net of tax 830 2,670
Comprehensive income (loss) $ 8,899 $ 9,618
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10. SEGMENT INFORMATION
Segment information has been prepared in accordance with SFAS No. 131
Disclosure about Segments of an Enterprise and Related Information. Under SFAS
No. 131, operating segments are defined as components of an enterprise about
which separate financial information is available and is evaluated regularly by
the chief decision maker, or decision-making group, in assessing performance.
Our chief operating decision-making group consists of the Chief Executive
Officer and other senior officials. This group routinely reviews and makes
operating and resource allocation decisions among our oil and gas operations and
its coal royalty and land management operations. Accordingly, our reportable
segments are as follows:
Oil and Gas - crude oil and natural gas exploration, development and
production.
Coal Royalty and Land Management - the leasing of mineral interests and
subsequent collection of royalties and the development and harvesting of timber.
Corporate and Other - primarily represents corporate functions.
Coal Royalty
and Land Corporate
Oil and Gas Management and Other Consolidated
(in thousands)
For the three months ended March 31, 2004:
Revenues $ 37,481 $ 17,963 $ 182 $ 55,626
Operating costs and expenses 13,111 4,006 1,999 19,116
Depreciation, depletion and amortization 9,282 4,769 105 14,156
Operating income (loss) $ 15,088 $ 9,188 $ (1,922) 22,354
Interest expense (1,390)
Interest income and other 274
Income before minority interest
and taxes $ 21,238
Total assets $ 418,262 $ 258,360 $ 4,044 $ 680,666
Additions to property and equipment $ 15,079 $ 404 $ 32 $ 15,515
For the three months ended March 31, 2003:
Revenues $ 34,548 $ 13,241 $ 227 $ 48,016
Operating costs and expenses 11,249 2,947 2,659 16,855
Depreciation, depletion and amortization 8,103 4,218 27 12,348
Operating income (loss) $ 15,196 $ 6,076 $ (2,459) 18,813
Interest expense (936)
Interest income 439
Income before minority interest
and taxes $ 18,316
Total assets $ 370,153 $ 264,830 $ 1,526 $ 636,509
Additions to property and equipment $ 48,151 $ 1,269 $ 77 $ 49,497
11. NEW ACCOUNTING STANDARDS
A reporting issue has arisen regarding the application of certain
provisions of SFAS No. 141, Business Combinations and SFAS No. 142, Goodwill and
Other Intangible Assets to companies in the extractive industries, including oil
and gas and coal industry companies. The issue is whether SFAS No. 142 requires
registrants to classify the costs of mineral rights as intangible assets in the
balance sheet, apart from other capitalized oil and gas property and coal
property costs, and provide specific footnote disclosures. The Emerging Issues
Task Force has added the treatment of oil and gas mineral rights to an upcoming
agenda, which may result in a change in how we are currently classifying these
assets. In April 2004, the Financial Accounting Standards Board (FASB) issued a
FASB Staff Position, which amends certain sections of SFAS No. 141 and No. 142
relating to the characterization of coal mineral rights. Beginning in the
second quarter of 2004, the Partnership will reclassify its leased coal mineral
rights back to tangible property.
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Oil and Gas Mineral Rights. Historically, we have included the costs of
mineral rights associated with extracting oil and gas as a component of oil and
gas properties under SFAS No. 19. Financial Accounting and Reporting by Oil and
Gas Producing Companies. If it is ultimately determined that SFAS No. 142
requires oil and gas companies to classify costs of mineral rights associated
with extracting oil and gas as a separate intangible assets line item on the
balance sheet, we would be required to reclassify approximately $156 million and
$157 million as of March 31, 2004 and December 31, 2003, respectively, out of
oil and gas properties and into a separate line item for oil and gas mineral
interest. Our cash flows and results of operations would not be affected since
such intangible assets would continue to be depleted and assessed for impairment
in accordance with successful efforts accounting rules. Further, we do not
believe the classification of the costs of mineral rights associated with
extracting oil and gas as intangible assets would have any impact on our
compliance with covenants under our debt agreements.
Coal Mineral Rights. Based on the application of certain provisions of
SFAS No. 141 and SFAS No. 142, the Partnership has classified costs associated
with the leasing of coal reserves acquired after June 30, 2001 as an intangible
asset in other assets on the balance sheet, apart from other capitalized
property costs. The amount capitalized related to a mineral right represents
its fair value at the time such right was acquired less accumulated
amortization. The transition provisions of SFAS No. 141 and SFAS No. 142 only
require the reclassification of amounts acquired after the June 30, 2001
effective date, unless previously maintained records make it possible to
reclassify rights acquired prior to that date. Prior to June 30, 2001, the
Partnership did not separately allocate acquisition costs between owned mineral
interests (tangible property) and leased mineral rights (intangible property),
as such interests were part of the same coal seams. Accordingly, the
Partnership only classified coal mineral rights acquired after June 30, 2001 as
an intangible asset in the accompanying consolidated balance sheet.
12. SUBSEQUENT EVENT
On May 4, 2004, our Board of Directors declared a two-for-one split of the
Company's Common Stock. To affect the split, one additional share of Common
Stock will be distributed on June 10, 2004 for each share of Common Stock held
of record at the close of business on June 3, 2004.
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