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United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 0R 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 001-12138
PDV America, Inc.
(Exact name of registrant as specified in its charter)
Delaware 51-0297556
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(State or other jurisdiction of (I. R. S. Employer Identification No.)
incorporation or organization)
750 Lexington Avenue, New York, New York 10022
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(Address of principal executive office) (Zip Code)
(212) 753-5340
--------------
(Registrant's telephone number, including area code)
N. A.
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, $1.00 par value 1,000
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(Class) (outstanding at April 30, 2000)
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PDV AMERICA, INC.
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 2000
TABLE OF CONTENTS
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Page
FACTORS AFFECTING FORWARD LOOKING STATEMENTS......................................................................1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - March 31, 2000 and December 31, 1999........................2
Condensed Consolidated Statements of Income - Three-Month Periods Ended
March 31, 2000 and 1999.............................................................................3
Condensed Consolidated Statement of Shareholders' Equity - Three-Month Period
Ended March 31, 2000................................................................................4
Condensed Consolidated Statements of Cash Flows - Three-Month Periods Ended
March 31, 2000 and 1999.............................................................................5
Notes to the Condensed Consolidated Financial Statements............................................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..............................................................................13
Item 3. Quantitative and Qualitative Disclosures About Market Risk.........................................16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..................................................................................20
Item 6. Exhibits and Reports on Form 8-K...................................................................20
SIGNATURES.......................................................................................................21
FACTORS AFFECTING FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains certain "forward looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Specifically, all statements under the caption "Item 2 - Management's Discussion
and Analysis of Financial Condition and Results of Operations" relating to
capital expenditures and investments related to environmental compliance and
strategic planning, purchasing patterns of refined products and capital
resources available to the Company (as defined herein) are forward looking
statements. In addition, when used in this document, the words "anticipate,"
"estimate," "prospect" and similar expressions are used to identify forward
looking statements. Such statements are subject to certain risks and
uncertainties, such as increased inflation, continued access to capital markets
and commercial bank financing on favorable terms, increases in regulatory
burdens, changes in prices or demand for the Company's products as a result of
competitive actions or economic factors and changes in the cost of crude oil,
feedstocks, blending components or refined products. Such statements are also
subject to the risks of increased costs in related technologies and such
technologies producing anticipated results. Should one or more of these risks or
uncertainties, among others, materialize, actual results may vary materially
from those estimated, anticipated or projected. Although the Company believes
that the expectations reflected by such forward looking statements are
reasonable based on information currently available to the Company, no
assurances can be given that such expectations will prove to have been correct.
1
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
PDV AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
- --------------------------------------------------------------------------- ------------------- --------------------
March 31, December 31,
2000 1999
(Unaudited)
------------------- --------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 45,312 $ 113,414
Accounts receivable, net 1,029,553 1,027,352
Due from affiliates 55,046 42,340
Inventories 1,045,329 1,097,923
Current portion of notes receivable from PDVSA 250,000 250,000
Prepaid expenses and other 25,004 16,949
------------------- --------------------
Total current assets 2,450,244 2,547,978
NOTES RECEIVABLES FROM PDVSA AND AFFILIATE 798,000 798,000
PROPERTY, PLANT AND EQUIPMENT - NET 3,388,066 3,417,815
RESTRICTED CASH - 3,015
INVESTMENTS IN AFFILIATES 738,370 758,812
OTHER ASSETS 236,095 219,946
------------------- --------------------
TOTAL ASSETS $ 7,610,775 $ 7,745,566
=================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term bank loans $ 147,000 $ 16,000
Accounts payable 883,441 780,660
Payables to affiliates 312,900 281,428
Taxes other than income 201,829 218,503
Other current liabilities 204,017 208,394
Income taxes payable 12,720 6,367
Current portion of deferred income taxes 10,994 9,716
Current portion of long-term debt 297,078 314,078
Current portion of capital lease obligation 16,356 16,356
------------------- --------------------
Total current liabilities 2,086,335 1,851,502
LONG-TERM DEBT 1,578,557 2,010,223
CAPITAL LEASE OBLIGATION 85,570 85,570
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS 211,782 212,871
OTHER NONCURRENT LIABILITIES 231,630 230,189
DEFERRED INCOME TAXES 624,482 607,213
MINORITY INTEREST 30,402 29,710
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY
Common stock, $1.00 par, 1,000 shares authorized,
issued and outstanding 1 1
Additional capital 1,532,435 1,532,435
Retained earnings 1,232,795 1,189,066
Accumulated other comprehensive income (3,214) (3,214)
------------------- --------------------
Total shareholders' equity 2,762,017 2,718,288
------------------- --------------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 7,610,775 $ 7,745,566
=================== ====================
(See Notes to the Condensed Consolidated Financial Statements.)
2
PDV AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in Thousands)
- --------------------------------------------------------------------------- ----------------------------------------
Three Months
Ended March 31,
------------------- --------------------
2000 1999
------------------- --------------------
REVENUES:
Sales $ 4,779,274 $ 2,231,389
Sales to affiliates 52,271 27,721
------------------- --------------------
4,831,545 2,259,110
Equity in earnings of affiliates 10,827 10,425
Interest income from affiliates 21,316 20,345
Other income (expense) - net (2,880) (9,547)
------------------- --------------------
4,860,808 2,280,333
------------------- --------------------
COST OF SALES AND EXPENSES:
Cost of sales and operating expenses 4,704,585 2,055,803
Selling, general and administrative expenses 46,346 58,010
Interest expense:
Capital leases 2,867 3,279
Other 37,703 37,547
Minority interest 691 413
------------------- --------------------
4,792,192 2,155,052
------------------- --------------------
INCOME BEFORE INCOME TAXES 68,616 125,281
INCOME TAXES 24,887 46,968
------------------- --------------------
NET INCOME $ 43,729 $ 78,313
=================== ====================
(See Notes to the Condensed Consolidated Financial Statements.)
3
PDV AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY (Unaudited)
(Dollars in Thousands)
- -------------------------------------------------------------------------------------------------------------------
Accumulated
Common Stock Other
Additional Retained Comprehensive
Shares Amount Capital Earnings Income Total
------ ------ ------- -------- ------ -----
BALANCE, DECEMBER 31, 1999 1 $ 1 $1,532,435 $1,189,066 $ (3,214) $2,718,288
Net income - - - 43,729 - 43,729
------------------------------------------------------------------------------------
BALANCE, MARCH 31, 2000 1 $ 1 $1,532,435 $1,232,795 $ (3,214) $2,762,017
====================================================================================
(See Notes to the Condensed Consolidated Financial Statements.)
4
PDV AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in Thousands)
- --------------------------------------------------------------------------- ----------------------------------------
Three Months
Ended March 31,
------------------- --------------------
2000 1999
------------------- --------------------
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES $ 281,888 $ 109,797
------------------- --------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (30,841) (59,340)
Proceeds from sale of property, plant and equipment 3,814 3,369
Decrease (Increase) in restricted cash 3,015 (166)
Loans to LYONDELL-CITGO Refining LP (2,700) -
Investments in and advances to other affiliates (5,500) -
------------------- --------------------
(32,212) (56,137)
------------------- --------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net repayments on revolving bank loans (447,000) (39,500)
Net proceeds from short-term bank loans 131,000 3,000
Dividend to parent - (2,297)
Repayments of other debt (1,778) (1,778)
------------------- --------------------
(317,778) (40,575)
------------------- --------------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (68,102) 13,085
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 113,414 34,822
------------------- --------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $45,312 $47,907
=================== ====================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest (net of amount capitalized) $46,391 $43,059
=================== ====================
Income taxes $ 31 $ 456
=================== ====================
(See Notes to the Condensed Consolidated Financial Statements.)
5
PDV AMERICA, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE-MONTH PERIODS ENDED MARCH 31, 2000 AND 1999
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The financial information for PDV America, Inc. ("PDV America" or the
"Company") subsequent to December 31, 1999 and with respect to the interim
three-month periods ended March 31, 2000 and 1999 is unaudited. In the
opinion of management, such interim information contains all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the results of such periods. The results of operations for
the three-month periods ended March 31, 2000 and 1999 are not necessarily
indicative of the results to be expected for the full year. Reference is
made to PDV America's Annual Report for the fiscal year ended December 31,
1999 on Form 10-K, dated March 30, 2000, for additional information.
The condensed consolidated financial statements include the accounts of
PDV America, its wholly-owned subsidiaries, CITGO Petroleum Corporation
("CITGO") and its wholly-owned subsidiaries and Cit-Con Oil Corporation,
which is 65 percent owned by CITGO, VPHI Midwest, Inc. ("Midwest") and its
wholly owned subsidiary, PDV Midwest Refining, L.L.C. ("PDVMR"), and PDV
USA, Inc. ("PDV USA") (collectively, the "Companies").
2. INVENTORIES
Inventories, primarily at LIFO, consist of the following:
March 31, December 31,
2000 1999
(Unaudited)
------------------ -------------------
(000's omitted)
Refined products $ 730,222 $ 814,785
Crude oil 247,130 215,248
Materials and supplies 67,977 67,890
----------- -----------
$ 1,045,329 $ 1,097,923
=========== ===========
6
3. LONG-TERM DEBT
March 31, December 31,
2000 1999
(Unaudited)
------------------------------------
(000's omitted)
Revolving bank loans - CITGO $ - $ 345,000
Revolving bank loan - PDVMR 15,000 117,000
Senior Notes $200 million face amount, due 2006 with
interest rate of 7.875% 199,814 199,806
Senior Notes $750 million face amount, due 2000 and 2003 with interest
rates from 7.75% to 7.875% 748,263 748,151
Private Placement Senior Notes, due 2000 to 2006 with interest rates from
9.03% to 9.30% 136,688 136,688
Master Shelf Agreement Senior Notes, due 2002 to 2009 with interest rates
from 7.17% to 8.94% 260,000 260,000
Tax Exempt Bonds, due 2004 to 2029 with variable
and fixed interest rates 325,370 325,370
Taxable Bonds, due 2026 to 2028 with variable interest rates 178,000 178,000
Cit-Con bank credit agreement 12,500 14,286
------------ ------------
1,875,635 2,324,301
Current portion of long-term debt 297,078 314,078
------------ ------------
$ 1,578,557 $ 2,010,223
============ ============
At March 31, 2000, the net year to date repayments on the revolving bank
loans were $447 million.
4. INVESTMENT IN LYONDELL-CITGO REFINING LP
LYONDELL-CITGO Refining LP ("LYONDELL-CITGO") owns and operates a 265 MBPD
refinery in Houston, Texas. LYONDELL-CITGO was formed in 1993 by
subsidiaries of CITGO and Lyondell Chemical Company (the "Owners"). The
heavy crude oil processed by the Houston refinery is supplied by Petroleos
de Venezuela, S.A. ("PDVSA" which may also be used to refer to one or more
of its subsidiaries) under a long-term crude oil supply contract that
expires in 2017. CITGO purchases substantially all of the gasoline, diesel
and jet fuel produced at the Houston refinery under a long-term contract.
In April 1998, the crude oil supplier exercised its contractual rights and
reduced deliveries of crude oil to LYONDELL-CITGO. LYONDELL-CITGO has been
required to obtain alternative sources of crude oil supply in replacement,
which has resulted in lower operating margins.
7
CITGO has a 41.25% participation interest in LYONDELL-CITGO. CITGO has a
one-time option to increase, for an additional investment, its
participation interest to 50 percent. This option must be exercised no
later than September 30, 2000.
CITGO has notes receivable from LYONDELL-CITGO which total $31 million and
$28 million at March 31, 2000 and December 31, 1999, respectively. The
notes bear interest at market rates and are due July 1, 2003. These notes
are included in other assets in the accompanying consolidated balance
sheets.
CITGO accounts for its investment in LYONDELL-CITGO using the equity
method of accounting and records its share of the net earnings of
LYONDELL-CITGO based on allocations of income agreed to by the Owners.
Information on CITGO's investment in LYONDELL-CITGO follows:
March 31, December 31,
2000 1999
---------------- --------------
(Unaudited)
(000s omitted)
Carrying value of investment $ 543,366 $ 560,227
Notes receivable 30,955 28,255
Participation interest 41% 41%
Summary of financial position:
Current assets $ 221,890 $ 219,365
Non current assets 1,399,162 1,405,879
Current liabilities 718,115 696,661
Non current liabilities 325,302 316,492
Member's equity 577,635 612,091
Three Months Ended March 31,
2000 1999
---------------- --------------
(Unaudited)
Equity in net income $ 6,276 $ 3,591
Cash distribution received 23,137 18,393
Summary of operating results:
Revenue $ 859,288 $ 431,750
Gross profit 47,873 42,248
Net income 21,810 14,864
LYONDELL-CITGO has arranged interim financing and repaid a $450 million
term loan that matured on May 5, 2000.
8
5. COMMITMENTS AND CONTINGENCIES
Litigation and Injury Claims - Various lawsuits and claims arising in the
ordinary course of business are pending against the Company. The Company
records accruals for potential losses when, in management's opinion, such
losses are probable and reasonably estimable. If known lawsuits and claims
were to be determined in a manner adverse to the Company, and in amounts
greater than the Company's accruals, then such determinations could have a
material adverse effect on the Company's results of operations in a given
reporting period. However, in management's opinion the ultimate resolution
of these lawsuits and claims will not exceed, by a material amount, the
amount of the accruals and the insurance coverage available to the
Company. This opinion is based upon management's and counsel's current
assessment of these lawsuits and claims. The most significant lawsuits and
claims are discussed below.
In May 1997, an explosion and fire occurred at CITGO's Corpus Christi
refinery. No serious personal injuries were reported. CITGO received
approximately 7,500 individual claims for personal injury and property
damage related to the incident. Approximately 1,300 of these claims have
been resolved for amounts which individually and collectively were not
material. There are presently seventeen lawsuits filed on behalf of
approximately 9,000 individuals arising out of this incident in federal
and state courts in Corpus Christi alleging property damages, personal
injury and punitive damages. A trial of one of the federal court lawsuits
in October 1998 involving ten bellwether plaintiffs, out of approximately
400 plaintiffs, resulted in a verdict for CITGO. The remaining plaintiffs
in this case have agreed to settle for an immaterial amount. Another
lawsuit, involving five plaintiffs, is scheduled for May 2000.
A class action lawsuit is pending in Corpus Christi, Texas state court
against CITGO and other operators and owners of nearby industrial
facilities which claims damages for reduced value of residential
properties located in the vicinity of the industrial facilities as a
result of air, soil and groundwater contamination. CITGO has contracted to
purchase all of the 275 properties included in the lawsuit which are in an
area adjacent to CITGO's Corpus Christi refinery and settle the property
damage claims relating to these properties. Related to this purchase,
$15.7 million was expensed in 1997. The trial judge recently ruled, over
CITGO's objections, that a settlement agreement CITGO entered into in
September 1997 and subsequently withdrew from, which provided for
settlement of the remaining property damage claims for $5 million is
enforceable. CITGO believes this ruling is erroneous and has appealed. The
trial against CITGO of these remaining claims has been postponed
indefinitely. Two related personal injury and wrongful death lawsuits were
filed against the same defendants in 1996 and are scheduled for trial in
2001.
Litigation is pending in federal court in Lake Charles, Louisiana against
CITGO by a number of current and former Lake Charles refinery employees
and applicants asserting claims of racial discrimination in connection
with CITGO's employment practices. The first trial in this case, which
involved two plaintiffs, began in October 1999 and resulted in verdicts
for the Company. The Court granted the Company's motion for summary
judgment with respect to another group of claims; an appeal of this ruling
is expected. Trials of the remaining cases are currently stayed.
Four former UNO-VEN Company ("UNO-VEN") marketers have filed a class
action complaint against UNO-VEN alleging improper termination of the
UNO-VEN Marketer Sales Agreement under the Petroleum Marketing Practices
Act in connection with PDVMR's 1997 acquisition of Union Oil Company of
California's interest in UNO-VEN. The lawsuit is pending in U.S. District
Court in Wisconsin and is in the discovery phase.
9
PDVMR and the Company, jointly and severally, have agreed to indemnify
UNO-VEN and certain other related entities against certain liabilities and
claims, including this matter.
CITGO is among defendants to lawsuits in California, North Carolina, New
York and Illinois alleging contamination of water supplies by methyl
tertiary butyl ether ("MTBE"), a component of gasoline. The action in
California was filed in November 1998 by the South Tahoe Public Utility
District and CITGO was added as a defendant in February 1999. The North
Carolina case, filed in January 1999, and the New York case, filed in
January 2000 are putative class actions on behalf of owners of water wells
and other drinking water supplies in such states. The Illinois class
action, filed in April 2000, purports to be on behalf of well owners in
sixteen states. All of these actions allege that MTBE poses public health
risks. The suits seek damages as well as remediation of the alleged
contamination. These matters are in early stages of discovery. CITGO has
denied all of the allegations and is pursuing its defenses.
Environmental Compliance and Remediation - The Company is subject to
various federal, state and local environmental laws and regulations which
may require the Company to take action to correct or improve the effects
on the environment of prior disposal or release of petroleum substances by
the Company or other parties. Management believes the Company is in
compliance with these laws and regulations in all material aspects.
Maintaining compliance with environmental laws and regulations in the
future could require significant capital expenditures and additional
operating costs.
The Company's accounting policy establishes environmental reserves as
probable site restoration and remediation obligations become reasonably
capable of estimation. Based on currently available information, including
the continuing participation of former owners in remediation actions and
indemnification agreements with third parties, the Company believes that
its accruals are sufficient to address its environmental clean-up
obligations.
The Texas Natural Resources Conservation Commission ("TNRCC") conducted an
environmental compliance review at the Corpus Christi refinery in the
first and second quarters of 1998. In January 1999, the TNRCC issued the
Company a Notice of Violation ("NOV") arising from this review and in
October 1999 proposed fines of approximately $1.6 million related to the
NOV. Most of the alleged violations refer to recordkeeping and reporting
issues, failure to keep proper records, failure to meet required emission
levels, and failure to properly monitor emissions. TNRCC issued the
Company another NOV in December 1999 based on its 1999 audits which cites
items similar to items cited earlier and the agency has tentatively
suggested that the two audits should be combined for resolution. The
Company intends to vigorously protest the alleged violations and proposed
fines.
In June 1999, CITGO and numerous other industrial companies received
notice from the U.S. Environmental Protection Agency ("EPA") that the EPA
believes these companies have contributed to contamination in the
Calcasieu Estuary, in the proximity of Lake Charles, Calcasieu Parish,
Louisiana and are Potentially Responsible Parties ("PRPs") under the
Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA"). The EPA made a demand for payment of its past investigation
costs from CITGO and other PRPs and advised it intends to conduct a
Remedial Investigation/Feasibility Study ("RI/FS") under its CERCLA
authority. CITGO and other PRPs may be potentially responsible for the
costs of the RI/FS. CITGO disagrees with the EPA's allegations and intends
to contest this matter.
In October 1999, the EPA issued a NOV to CITGO for violations of federal
regulations regarding reformulated gasoline found during a May 1998
inspection of CITGO's Braintree, Massachusetts
10
terminal and recommended a penalty of $218,500. The Company intends to
vigorously contest the proposed fines and allegations.
On June 28, 1999, PDVMR received a Finding of Violation ("FOV") from the
EPA (Region V) for alleged violations of the federal benzene New Source
Hazardous Air Pollutants regulations under the Federal Clean Air Act at
the Lemont refinery operated by CITGO. PDVMR is currently in negotiations
with the EPA concerning the FOV. While PDVMR does not expect this matter
to have a material financial impact on the Company, it can reasonably
anticipate proposed penalties to exceed $100,000.
In November 1999, the Attorney General's Officer of Illinois filed a
complaint in the 12th Judicial Circuit Court, Will County, Illinois
against PDV Midwest Refining and CITGO Petroleum Corporation alleging
damages from several releases to the air of contaminants from the Lemont,
Illinois refinery. The initial complaint addressed alleged violations and
potential compliance actions. The Attorney General's office later made a
demand for penalties of approximately $150,000. While CITGO and PDVMR
disagree with the Attorney General's alleged violations and proposed
penalty demand, they are cooperating with the agency and anticipate
reaching an agreement with the agency to resolve this lawsuit by late
2000.
Conditions which require additional expenditures may exist with respect to
various Company sites including, but not limited to, the Company's
operating refinery complexes, closed refineries, service stations and
crude oil and petroleum product storage terminals. The amount of such
future expenditures, if any, is indeterminable.
Derivative Commodity and Financial Instruments - The Company enters into
petroleum futures contracts, options and other over-the-counter commodity
derivatives, primarily to reduce its inventory exposure to market risk.
Such contracts are generally entered into through major brokerage houses
and traded on national exchanges and can be settled in cash or through
delivery of the commodity. Such contracts generally qualify for hedge
accounting and correlate to market price movements of crude oil and
refined products. Resulting gains and losses on such contracts, therefore,
will generally be offset by gains and losses on the Company's hedged
inventory or future purchases and sales. In the three-month period ended
March 31, 2000, there was no non-hedging activity.
The Company has only limited involvement with other derivative financial
instruments and does not currently use them for trading purposes. The
Company has entered into various interest rate swaps to manage its risk
related to interest rate changes on its debt. The fair value of the
interest rate swap agreements in place at March 31, 2000, based on the
estimated amount that the Company would receive or pay to terminate the
agreements as of that date and taking into account current interest rates,
was an unrealized loss of $1 million. In connection with the determination
of fair market value, the Company considers the creditworthiness of the
counterparties, but no adjustment was determined to be necessary as a
result.
The impact of these instruments on cost of sales and operating expenses
and pretax earnings was immaterial for all periods presented. Management
considers the market risk to the Company related to these instruments to
be insignificant during the periods presented.
6. RELATED PARTY TRANSACTIONS
CITGO's largest supplier of crude oil is PDVSA. CITGO has entered into
long-term crude oil supply agreements with PDVSA with respect to the crude
oil requirements for each of CITGO's refineries.
11
These crude oil supply agreements contain force majeure provisions which
entitle the supplier to reduce the quantity of crude oil and feedstocks
delivered under the crude supply agreements under specified circumstances.
As of March 31, 2000, PDVSA's deliveries of crude oil to CITGO were less
than contractual base volumes due to PDVSA's declaration of force majeure
pursuant to all of the long-term crude oil supply contracts related to
CITGO's refineries. Therefore, CITGO has been required to use alternative
sources of crude oil. As a result, CITGO estimates that crude oil costs in
the three months ended March 31, 2000 were higher by $5 million than what
would have otherwise been the case. It is not possible to forecast future
financial impacts of these reductions in crude oil deliveries on CITGO's
costs because the correlation between crude oil and refined product prices
is not constant over time. Additionally, because of numerous factors,
including unpredictable changes in crude oil economics, the duration of the
force majeure cannot be forecasted.
These contracts also contain provisions which entitle the supplier to
reduce the quantity of crude oil and feedstocks delivered under the crude
supply agreements and oblige the supplier to pay CITGO the deemed margin
under that contract for each barrel of reduced crude oil and feedstocks.
During the three months ended March 31, 2000, PDVSA did not deliver naphtha
pursuant to two of the contracts and, as a result, naphtha costs, net of
deemed margin, were higher by $1 million than what would have otherwise
been the case.
12
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The following discussion of the financial condition and results of
operations of PDV America should be read in conjunction with the unaudited
condensed consolidated financial statements of PDV America included elsewhere
herein. Reference is made to PDV America's Annual Report for the fiscal year
ended December 31, 1999 on Form 10-K, dated March 30, 2000, for additional
information and a description of factors which may cause substantial
fluctuations in the earnings and cash flows of PDV America.
In the first quarter ended March 31, 2000, PDV America generated net
income of $43.7 million on revenue of $4.9 billion compared to net income of
$78.3 million on revenues of $2.3 billion for the same period last year. Gross
margin for the first quarter of 1999 benefited from the sale of inventories that
were written down by $172 million at December 31, 1998, to reflect market prices
at that time. (See "Gross margin").
CITGO's revenue accounted for over 99% of PDV America's consolidated
revenues in the first three months of 2000 and 1999. PDVMR's sales of $451
million for the three-month period ended March 31, 2000 were primarily to CITGO
and, accordingly, these were eliminated in consolidation.
Results of Operations
The following table summarizes the sources of PDV America's sales
revenues and sales volumes for the three-month periods ended March 31, 2000 and
1999:
PDV America's Sales Revenues and Volumes
Three Months Three Months
Ended March 31, Ended March 31,
2000 1999 2000 1999
---- ---- ---- ----
($ in millions) (MM gallons)
Gasoline $ 2,655 $1,256 3,141 3,101
Jet fuel 494 191 611 536
Diesel/#2 fuel 1,094 452 1,380 1,309
Asphalt 47 26 77 70
Petrochemicals and industrial products 391 196 386 577
Lubricants and waxes 115 119 56 68
----------------------- -----------------------
Total refined product sales 4,796 2,240 5,651 5,661
Other sales 36 19
----------------------- -----------------------
Total sales $ 4,832 $2,259 5,651 5,661
======================= =======================
13
The following table summarizes PDV America's cost of sales and
operating expenses for the three-month periods ended March 31, 2000 and 1999:
PDV America's Cost of Sales and Operating Expenses
Three Months
Ended March 31,
---------------
2000 1999
---- ----
($ in millions)
Crude oil $ 1,461 $ 604
Refined products 2,435 1,132
Intermediate feedstocks 317 137
Refining and manufacturing costs 251 248
Other operating costs, expenses and inventory changes (1) 241 65)
---------------------
Total cost of sales and operating expenses $ 4,705 $ 2,056
---------------------
(1) The three months ended March 31, 1999, includes the impact of the inventory
valuation reserve of $172 million recorded at December 31, 1998. See "Gross
Margin".
Sales revenues and volumes. Sales increased $2.6 billion, or
approximately 114%, in the three-month period ended March 31, 2000 as compared
to the same period in 1999. This was due to an increase in average sales price
of 115% and a decrease in sales volume of less than 1%. (See PDV America's Sales
Revenues and Volumes table above.)
Cost of sales and operating expenses. Cost of sales and operating
expenses increased by $2.6 billion or 129%, in the quarter ended March 31, 2000
as compared to the same period in 1999. (See PDV America's Cost of Sales and
Operating Expenses table above.)
The Company purchases refined products to supplement the production
from its refineries to meet marketing demands and resolve logistical issues.
Refined product purchases represented 52% and 55% of total cost of sales and
operating expenses for the first quarters of 2000 and 1999, respectively. The
Company estimates that margins on purchased products, on average, are lower than
margins on produced products due to the fact that the Company can only receive
the marketing portion of the total margin received on the produced refined
products. However, purchased products are not segregated from the Company
produced products and margins may vary due to market conditions and other
factors beyond the Company's control. As such, it is difficult to measure the
effects on profitability of changes in volumes of purchased products. In the
near term, other than normal refinery turnaround maintenance, the Company does
not anticipate operational actions or market conditions which might cause a
material change in anticipated purchased product requirements; however, there
could be events beyond the control of the Company which impact the volume of
refined products purchased. See also "Factors Affecting Forward Looking
Statements."
Gross margin. The gross margin for the three-month period ended March
31, 2000 was approximately 2.3 cents per gallon, compared to approximately 3.6
cents per gallon for the same period in 1999. In the three-month period ended
March 31, 2000, the revenue per gallon component increased approximately 114%
while the cost per gallon component increased approximately 129%. As a result,
the
14
gross margin decreased approximately 1.3 cents on a per gallon basis in the
quarter ended March 31, 2000 compared to the same period in 1999. Inventories at
December 31, 1998 had been revalued resulting in a charge of $172 million to the
results of operations for the year 1998. The sale of these revalued inventories
during the first quarter of 1999 is the principal factor in the higher gross
margins realized during the first quarter of 1999. At March 31, 2000 and 1999
estimated net market values of inventories exceeded historical cost, and
accordingly, no valuation reserve was necessary.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased in the first quarter of 2000 by 20%, from $58
million in the first quarter of 1999 to $46 million in the first quarter of
2000. The decrease is principally due to the write-off of the bad debt reserve
related to credit card receivables. The write-off was in connection with the
sale of CITGO's proprietary consumer credit card receivables and related credit
card program on March 1, 2000 as described below.
Liquidity and Capital Resources
For the three-month period ended March 31, 2000, the Company's
consolidated net cash provided by operating activities totaled approximately
$282 million. Operating cash flows were derived from net income of $44 million,
depreciation and amortization of $69 million, and changes in other assets and
liabilities of $169 million.
Net cash used in investing activities totaled $32 million for the
three-month period ended March 31, 2000 consisting primarily of capital
expenditures of $31 million (compared to $59 million for the same period in
1999). The decline in capital expenditures in the first quarter of 2000 compared
to the first quarter of 1999 is due primarily to projects which are progressing
more slowly than anticipated and projects which had to be postponed when the
turnarounds with which they were associated were postponed.
Net cash used in financing activities totaled $318 million for the
three-month period ended March 31, 2000 consisting primarily of $447 million net
repayment on revolving bank loans partially offset by proceeds from short-term
borrowings of $131 million.
As of March 31, 2000, capital resources available to the Company
include cash generated by operations, available borrowing capacity under CITGO's
committed bank facilities of $550 million and $53 million of uncommitted
short-term borrowing facilities with various banks and available borrowing
capacity under PDVMR's revolving credit facility of $85 million. Additionally,
the remaining $400 million from CITGO's shelf registration with the Securities
and Exchange Commission for $600 million of debt securities may be offered and
sold from time to time. The Company's management believes that the Company has
sufficient capital resources to carry out planned capital spending programs,
including regulatory and environmental projects in the near term, and to meet
currently anticipated future obligations as they arise. In addition, PDV America
intends that payments received from PDVSA under the Mirror Notes will provide
funds to service PDV America's Senior Notes. The Company periodically evaluates
other sources of capital in the marketplace and anticipates that long-term
capital requirements will be satisfied with current capital resources and future
financing arrangements, including the issuance of debt securities. The Company's
ability to obtain such financing will depend on numerous factors, including
market conditions and the perceived creditworthiness of the Company at that
time.
On March 1, 2000, CITGO sold its proprietary consumer credit card
receivables and related credit card program to Associates First Capital
Corporation ("Associates"). In this transaction, Associates acquired
approximately $19 million in receivables from CITGO and $113 million from Royal
Bank of Canada which had previously been purchased from CITGO under a revolving
sale facility. In addition,
15
Associates acquired 1.2 million active consumer accounts. The sale did not
affect CITGO's commercial or fleet credit card programs.
The Company is in compliance with its obligations under its debt
financing arrangements at March 31, 2000.
New Accounting Standard
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). The statement establishes
accounting and reporting standards for derivative instruments and for hedging
activities. It requires that an entity recognize all derivatives, at fair value,
as either assets or liabilities in the statement of financial position with an
offset either to shareholder's equity and comprehensive income or income
depending upon the classification of the derivative. The Company has not
determined the impact on its financial statements that may result from adoption
of SFAS No. 133, which is required no later than January 1, 2001.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Introduction. The Company has exposure to price fluctuations of crude
oil and refined products as well as fluctuations in interest rates. To manage
these exposures, management has defined certain benchmarks consistent with its
preferred risk profile for the environment in which the Company operates and
finances its assets. The Company does not attempt to manage the price risk
related to all of its inventories of crude oil and refined products. As a
result, at March 31, 2000, the Company was exposed to the risk of broad market
price declines with respect to a substantial portion of its crude oil and
refined product inventories. The following disclosures do not attempt to
quantify the price risk associated with such commodity inventories.
Commodity Instruments. CITGO balances its crude oil and petroleum
product supply/demand and manages a portion of its price risk by entering into
petroleum commodity derivatives. Generally, CITGO's risk management strategies
qualify as hedges, however, certain strategies that CITGO may use on commodity
positions do not qualify as hedges.
16
Non Trading Commodity Derivatives
Open Positions at March 31, 2000
Maturity Number of Contract Market
Commodity Derivative Date Contracts Value (2) Value
--------- ---------- ---- --------- --------- -------
($ in millions)
------------------
No Lead Gasoline (1) Futures Purchased 2000 69 $ 2.5 $ 2.5
Futures Sold 2000 60 $ 2.1 $ 2.2
OTC Swap Options Purchased 2000 1,500 $(0.5) $ -
OTC Swap Options Sold 2000 1,500 $ 0.5 $(0.1)
OTC Swaps (Pay Floating/Receive Fixed)(4) 2000 500 $14.0 $16.6
Heating Oil (1) Futures Purchased 2000 71 $ 1.8 $ 2.0
Futures Purchased 2001 19 $ 0.5 $ 0.5
Futures Sold 2000 75 $ 2.4 $ 2.5
OTC Swaps (Pay Floating/Receive Fixed)(4) 2000 400 $ 9.7 $11.5
OTC Swaps (Pay Fixed/Receive Floating)(4) 2000 10 $ 0.2 $ 0.3
Crude Oil (1) OTC Swaps (Pay Fixed/Receive Floating)(4) 2000 900 $21.0 $23.8
Natural Gas (3) Futures Purchased 2000 15 $ 0.4 $ 0.4
- ------------
(1) 1000 barrels per contract
(2) Weighted average price
(3) 10,000 mmbtu per contract
(4) Floating price based on market index designated in contract; fixed price
agreed upon at date of contract.
Non Trading Commodity Derivatives
Open Positions at March 31, 1999
Maturity Number of Contract Market
Commodity Derivative Date Contracts Value (2) Value
--------- ---------- ---- --------- --------- -----
($ in millions)
---------------
No Lead Gasoline (1) Futures Purchased 1999 44 $ 1.0 $ 1.0
Futures Sold 1999 25 $ 0.5 $ 0.5
Heating Oil (1) Futures Purchased 1999 117 $ 2.4 $ 2.2
Futures Sold 1999 25 $ 0.4 $ 0.5
OTC Caps Purchased 1999 60 $ - $ -
Natural Gas (3) Futures Purchased 1999 150 $ 2.9 $ 3.2
- ------------
(1) 1000 barrels per contract
(2) Weighted average price
(3) 10,000 mmbtu per contract
17
Debt Related Instruments. CITGO has fixed and floating U.S. currency
denominated debt. CITGO uses interest rate swaps to manage its debt portfolio
toward a benchmark of 40 to 60 percent fixed rate debt to total fixed and
floating rate debt. These instruments have the effect of changing the interest
rate with the objective of minimizing CITGO's long-term costs. At March 31,
2000, CITGO's primary exposures were to U.S. dollar, LIBOR and U.S. Treasury
rates.
For interest rate swaps, the table below presents notional amounts and
interest rates by expected (contractual) maturity dates. Notional amounts are
used to calculate the contractual payments to be exchanged under the contracts.
Non Trading Interest Rate Derivatives
Open Positions at March 31, 2000 and 1999
Notional
Expiration Fixed Rate Principal
Variable Rate Index Date Paid Amount
------------------- ---- ---- ------
($ in millions)
One-month LIBOR May 2000 6.28% $ 25
J.J. Kenny May 2000 4.72% 25
J.J. Kenny February 2005 5.30% 12
J.J. Kenny February 2005 5.27% 15
J.J. Kenny February 2005 5.49% 15
----
$ 92
The fair value of the interest rate swap agreements in place at March
31, 2000, based on the estimated amount that CITGO would receive or pay to
terminate the agreements as of that date and taking into account current
interest rates, was an unrealized loss of $1 million.
18
For debt obligations, the table below presents principal cash flows and
related weighted average interest rates by expected maturity dates. Weighted
average variable rates are based on implied forward rates in the yield curve at
the reporting date.
Debt Obligations
At March 31, 2000
Expected Average
Fixed Average Fixed Variable Variable
Expected Maturities Rate Debt Interest Rate Rate Debt Interest Rate
------------------- --------- ------------- --------- -------------
($ in millions) ($ in millions)
2000 $ 290 9.11% $ 167 7.17%
2001 40 9.11% 7 7.54%
2002 36 8.78% - 8.20%
2003 560 8.79% - 8.54%
2004 31 8.02% 16 8.71%
Thereafter 391 8.02% 485 9.32%
------ ----- ----- -----
Total $1,348 8.29% $ 675 8.77%
====== ===== ===== =====
Fair Value $1,319 $ 675
====== =====
Debt Obligations
At March 31, 1999
Expected
Fixed Average Fixed Variable Average Variable
Expected Maturities Rate Debt Interest Rate Rate Debt Interest Rate
------------------- --------- ------------- --------- -------------
($ in millions) ($ in millions)
1999 $ 40 9.11% $ 45 6.25%
2000 290 9.11% 7 6.34%
2001 40 9.11% 7 6.76%
2002 36 8.78% 76 7.18%
2003 559 8.79% 95 7.59%
Thereafter 422 8.02% 500 9.58%
------ ----- ---- -----
Total $1,387 8.34% $730 8.98%
====== ===== ==== =====
Fair Value $1,350 $730
====== ====
19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The required information is incorporated by reference into Part II of this
Report from Note 5 of the Notes to the Condensed Consolidated Financial
Statements included in Part I of this Report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
--------
Exhibit No. Description
----------- -----------
27 Financial Data Schedule (filed
electronically only)
(b) Reports on Form 8-K:
--------------------
None.
20
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PDV AMERICA, INC.
Date: May 12, 2000 /s/ Luis Centeno
------------------------------
Luis Centeno
President, Chief Executive and Financial
Officer and Director
Date: May 12, 2000 /s/ Jose I. Moreno
------------------------------
Jose I. Moreno
Secretary and Director
21