3.  PRICE RISK MANAGEMENT5.  HEDGING ACTIVITIES

Commodity Hedges

    From time to time, we enter into derivative financial instruments to mitigate our exposure to natural gas and crude oil price volatility.  The derivative financial instruments, which are placed with major financial institutions that we believe are minimum credit risks, take the form of costless collars and swaps.  All derivative financial instruments are recognized in the financial statements at fair value in accordance with Statement of Financial Accounting Standards ("SFAS")SFAS No. 133,Accounting for Derivative Instruments and Certain Hedging Activities, as amended by SFAS No. 137 and SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, and Amendment of FASB Statement No. 133.138.

    All derivative instruments are recorded on the balance sheet at fair value.  If the derivative does not qualify as a hedge or is not designated as a hedge, the gain or loss on the derivative is recognized currently in earnings.  To qualify for hedge accounting, the derivative must qualify either as a fair value hedge, cash flow hedge or foreign currency hedge.  Currently, we are utilizing only cash flow hedges and the remaining discussion will relate exclusively to this type of derivative instrument. All hedge transactions are subject to our risk management policy, which has been reviewed and approved by the Board of Directors.

7    We formally document all relationships between hedging instruments and hedged items, as well as the risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as cash flow hedges to forecasted transactions. We also formally assess, both at inception of the hedge and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged transactions. We measure hedge effectiveness on a period basis. When it is determined that a derivative is not highly effective as a hedge, or that it has ceased to be a highly effective hedge, we discontinue hedge accounting prospectively.

9

  When hedge accounting is discontinued because it is probable that a forecasted transaction will not occur, the derivative will continue to be carried on the balance sheet at its fair value, and gains and losses that were accumulated in other comprehensive income will be recognized in earnings immediately. In all other situations in which hedge accounting is discontinued, the derivative will be carried at its fair value on the balance sheet, with changes in its fair value recognized in earnings prospectively.

    Gains and losses on hedging instruments when settled are included in natural gas or crude oil production revenues in the period that the related production is delivered.

    The fair values of our hedging instruments are determined based on third party forward price quotes for NYMEX Henry Hub and West Texas Intermediate closing prices as of March 31, 2003.  The following table sets forth our positions as of March 31, 2003:

    Based upon our assessment of our derivative contracts at March 31, 2003, we reported (i) an approximate price risk management liability of $3.9 million, an approximate price risk management asset of $0.5 million and (ii) a loss in accumulated other comprehensive income of $2.2 million, net of a related income tax benefit of $1.2 million.  In connection with monthly settlements, we recognized net hedging losses in natural gas and oil revenues of $4.1 million for the three months ended March 31, 2003.  Based upon future oil and natural gas prices as of March 31, 2003, $2.9 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 gains of $1.2 million for the three months ended March 31, 2002.

Interest Rate Swap

      In March 2003, PVR entered into an interest rate swap agreement with a notional amount of $30 million, to hedge a portion of the fair value of its 5.77 percent senior unsecured 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 $0.1 million as of March 31, 2003, with a corresponding increase in long-term assets. 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 plus 2.36 percent.  See Note 5 (Long-term Debt) for a description of the underlying debt instrument to which the interest rate swap applies.

10

6.  LONG-TERM DEBT

    At March 31, 2003 and December 31, 2002, long-term debt consisted of the following (in thousands):

Penn Virginia Revolving Credit Facility

      We have a $150 million secured revolving credit facility which expires in October 2004 (the "Revolver") with a group of major commercial banks.  Subsequent to March 31, 2003, the borrowing base was increased from $140 million to $150 million.

      The Revolver is governed by a borrowing base calculation and will be redetermined semi-annually.  We have the option to elect interest at (i) LIBOR plus a Eurodollar margin ranging from 1.375 to 1.875 percent, based on the percentage of the borrowing base outstanding or (ii) the greater of the federal funds rate plus a margin ranging from 0.375 to 0.875 percent or the prime rate as announced by the agent bank. The weighted average interest rate on borrowings incurred during the year ended December 31, 2002 was approximately 3.0 percent.  The Revolver provides for the issuance of letters of credit that are limited to no more than an aggregate of $10 million.  The financial covenants require us to maintain certain levels of net worth, debt-to-earnings, and earnings-to-interest. Certain dividend limitation restrictions are also included.  We are currently in compliance with all of our covenants.

PVR Revolving Credit Facilty

      In connection with the closing of PVR's initial public offering in October 2001, PVR entered into a three-year $50 million revolving credit facility (the "PVR Revolver") with a syndicate of major commercial banks, which expires in October 2004. The PVR Revolver is available for general partnership purposes, including working capital, capital expenditures and acquisitions, and includes a $5.0 million distribution sublimit that is available for working capital needs and distributions and a $5.0 million sublimit for the issuance of letters of credit.

      Indebtedness under the PVR Revolver will bear interest, at PVR's option, at either (i) the higher of the federal funds rate plus 0.50 percent or the prime rate as announced by PNC Bank, National Association or (ii) the Euro-dollar rate plus an applicable margin which ranges from 1.25 percent to 1.75 percent based on PVR's ratio of consolidated indebtedness to consolidated EBITDA (as defined in the credit agreement) for the four most recently completed fiscal quarters. The PVR Revolver prohibits PVR from making distributions to unitholders and distributions in excess of available cash if any potential default or event of default, as defined in the credit agreement, occurs or would result from the distribution. The financial covenants of the PVR Revolver require PVR to maintain certain levels of debt-to-earnings and earnings-to-interest.  The Partnership is currently in compliance with all of the PVR Revolver covenants.

PVR Senior Unsecured Notes

      In March 2003, PVR closed a private placement of $90 million of senior unsecured notes payable (the "PVR Notes").  The PVR Notes bear interest at a fixed rate of 5.77 percent and mature over a ten year period ending in March 2013, with semi-annual interest payments through March 2004 followed by principal and interest payments beginning in September 2004.  Proceeds of the PVR Notes after the payment of expenses related to the offering were used to repay a $43.4 million PVR term loan and to repay the majority outstanding under its Revolver.

      The $43.4 million PVR term loan that was repaid in March 2003 originated in conjunction with the closing of PVR's initial public offering in October 2001.  PVR borrowed $43.4 million under the term loan and purchased and pledged $43.4 million of U.S. Treasury notes, which secured the credit facility. In 2002, the U.S. Treasury Notes were liquidated for the purpose of funding acquisitions.

11

      Concurrent with the closing of the PVR Notes, PVR also entered into an interest rate derivative transaction to convert $30 million of the debt from a fixed interest rate to a floating interest rate, as described further in Note 5 (Hedging Activities, Interest Rate Swap).

      The PVR Notes prohibit PVR from making distributions to unitholders and distributions in excess of available cash if any potential default or event of default, as defined in the Notes, occurs or would result from the distribution. In addition, the PVR Notes contain various covenants similar as to those contained in the PVR Revolver.

7.  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.

Advisory Services

    On March 25, 2002, we entered into an agreement with an investment banking firm to provide financial advisory services in connection with our receipt and consideration of various shareholder proposals.  The fees payable under this agreement cannot be calculated with certainty until the time of actual payment which will occur on or before November 30, 2003.  As of March 31, 2003, based on a range of probable payment amounts, we have recognized a cumulative liability of approximately $2.3 million for services rendered in connection with this agreement, of which $0.8 million was recognized for the three months ended March 31, 2003.  We will continue to accrue additional expenses under this agreement in accordance with our best estimate of the amount due for such services.

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 income from continuing operations for the three months ended March 31, 2003 and 2002 (in thousands, except per share data).

12

9. COMPREHENSIVE INCOME

    Comprehensive income represents all changes in equity during the reporting period, including net income and charges directly to equity, which are excluded from net income. For the three month periods ended March 31, 2003 and 2002, the components of comprehensive income were as follows (in thousands):

10.  SEGMENT INFORMATION

    Penn Virginia's operations are classified into two operating segments:

    Oil and Gas - crude oil and natural gas exploration, development and production.

    Coal Royalty and Land Management - the leasing of mineral rights and subsequent collection of royalties and the development and harvesting of timber.  This segment's activities are conducted through Penn Virginia's ownership interest in Penn Virginia Resource Partners, L.P.

      All other - primarily represents corporate functions.

13

11.  NEW ACCOUNTING STANDARDS

        In November 2002, the FASB issued Interpretation No. 45 ( FIN 45), Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of the Indebtedness of Others, which clarifies the requirements of SFAS No. 5, Accounting for Contingencies, relating to a guarantor's accounting for and disclosures of certain guarantees issued. FIN 45 requires enhanced disclosures for certain guarantees. It also will require certain guarantees that are issued or modified after December 31, 2002, including certain third-party guarantees, to be initially recorded on the balance sheet at fair value. For guarantees issued on or before December 31, 2002, liabilities are recorded when and if payments become probable and estimable. The financial statement recognition provisions are effective prospectively, and the Company cannot reasonably estimate the impact of adopting FIN 45 until guarantees are issued or modified in future periods, at which time their results will be initially reported in the financial statements.

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

      We operate in two business segments: oil and gas and coal royalty and land management. The oil and gas segment includes the exploration for, and the development and production of, crude oil, condensate and natural gas primarily in the eastern and Gulf Coast onshore areas of the United States, and our ownership of mineral rights to oil and gas reserves. The coal royalty and land management segment includes the leasing of coal reserves, services provided by fee-based assets, and the sale of timber, owned by Penn Virginia Resource Partners, L.P. (the "Partnership" or "PVR"). The assets, liabilities and earnings of PVR are included in our consolidated financial statements, with the public unitholders' 55 percent interest in PVR reflected as a minority interest.  Selected operating and financial data by segment is presented below.

Critical Accounting Policies and Estimates

Oil and Gas Properties.  We use the successful efforts method of accounting for our oil and gas operations. Under this method of accounting, costs to acquire mineral interests in oil and gas properties and to drill and equip development wells (including development dry holes) are capitalized and amortized on a unit-of-production basis over the remaining life of proved developed reserves and proved reserves, respectively.  Costs of drilling exploratory wells are initially capitalized, and later charged to expense upon determination that the well does not justify commercial development.  Other exploratory costs, including annual delay rentals and geological and geophysical costs, are charged to expense when incurred.

      The costs of unproved leaseholds are capitalized pending the results of exploration efforts. Unproved leasehold costs are assessed periodically, on a property-by-property basis, and a loss is recognized to the extent, if any, that the cost of the property has been impaired. As unproved leaseholds are determined to be productive, the related costs are transferred to proved leaseholds and amortized on a unit-of-production basis.

Other Property and Equipment.  Other property and equipment is carried at cost and includes expenditures for additions and improvements, which substantially increase the productive lives of existing assets.  Maintenance and repair costs are expensed as incurred. Depreciation of property and equipment is generally computed using the straight-line method over their estimated useful lives, varying from 3 years to 20 years.  Coal properties are depleted on an area-by-area basis at a rate based upon the cost of the mineral properties and estimated proven and probable 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 a gain or loss.

      Impairment of Long-Lived Assets.  We review our long-lived assets to be held and used, including proved oil and gas properties and the Partnership's coal properties, whenever events or circumstances indicate that the carrying value of those assets may not be recoverable.  An impairment loss must be recognized when the carrying amount of an asset exceeds the sum of the undiscounted estimated future cash flows.  In this circumstance, we would recognize an impairment loss equal to the difference between the carrying value and the fair value of the asset.  Fair value is estimated to be the expected present value of future net cash flows from proved reserves, discounted utilizing a risk-free interest rate commensurate with the remaining lives for the respective oil and gas properties.

14

Oil and Gas Revenues. Oil and gas revenues are recognized when crude oil and natural gas volumes are produced and sold for our account.  Each working interest owner in a well generally has the right to a specific percentage of production, and often actual production sold for any particular owner will differ from such owner's ownership percentage.  When, under contract terms, these differences are settled in cash, revenues are adjusted accordingly.

Coal Royalties. Coal royalty revenues are recognized on the basis of tons of coal sold by the Partnership's lessees and the corresponding revenue from those sales. Coal leases other than those with Peabody Energy Corporation ("Peabody") affiliates are based on minimum monthly or annual payments, a minimum dollar royalty per ton and/or a percentage of the gross sales price.  Peabody leases are based on fixed royalties which escalate annually and also provide for minimum monthly payments.

Coal Services. Coal services revenues are recognized when lessees use the Partnership's facilities for the processing and transportation of coal. Coal services revenues consist of fees collected from the Partnership's lessees for the use of the Partnership's loadout facility, coal preparation plants and dock loading facility.

      Timber. Timber revenues are recognized as timber is sold on a contract basis where independent contractors harvest and sell the timber and, from time to time, in a competitive bid process involving sales of standing timber on individual parcels.  Title and risk of loss pass to the independent contractors upon the execution of the contract. In addition, if the contractors do not harvest the timber within the specified time period, the title of the timber reverts back to the Partnership with no refund of original payment.

Minimum Rentals.  Most of the Partnership's lessees are required to make minimum monthly or annual payments that are generally recoupable over certain time periods.  These minimum payments are recorded as deferred income.  If the lessee recoups a minimum payment through production, the deferred income attributable to the minimum payment is recognized as coal royalty revenues.  If a lessee fails to meet its minimum production for the recoupment period, the deferred income attributable to the minimum payment is recognized as minimum rental revenues.  Revenues associated with minimum rentals are included in other revenues.

Price Risk Management Activities.  From time to time, we enter into derivative financial instruments to mitigate our exposure to natural gas and crude oil price volatility.  The derivative financial instruments, which are placed with major financial institutions that we believe are minimum credit risks, take the form of costless collars and swaps.  All derivative instruments are recorded on the balance sheet at fair value.  If the derivative does not qualify as a hedge or is not designated as a hedge, the gain or loss on the derivative is recognized currently in earnings.  To qualify for hedge accounting, the derivative must qualify either as a fair value hedge, cash flow hedge or foreign currency hedge.  Currently, we are utilizing only cash flow hedges and the remaining discussion will relate exclusively to this type of derivative instrument. All hedge transactions are subject to our risk management policy, which has been reviewed and approved by the Board of Directors.  We formally document all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as cash flow hedges to forecasted transactions. We also formally assess, both at inception of the hedge and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged transactions. We measure hedge effectiveness on a period basis. When it is determined that a derivative is not highly effective as a hedge, or that it has ceased to be a highly effective hedge, we discontinue hedge accounting prospectively.

  When hedge accounting is discontinued because it is probable that a forecasted transaction will not occur, the derivative will continue to be carried on the balance sheet at its fair value, and gains and losses that were accumulated in other comprehensive income will be recognized in earnings immediately. In all other situations in which hedge accounting is discontinued, the derivative will be carried at its fair value on the balance sheet, with changes in its fair value recognized in earnings prospectively.

  Gains and losses on hedging instruments when settled are included in natural gas or crude oil production revenues in the period that the related production is delivered.

  The fair valuevalues of our hedging instruments isare determined based on third party forward price quotes for NYMEX Henry Hub and West Texas Intermediate closing price's as of September 30, 2002.  The following table sets forth our positions as of September 30, 2002: