SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1996
-------------
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
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
750 Lexington Avenue, New York, New York 10022
----------------------------------------------
(Address of principal executive office) (Zip Code)
(212) 753-5340
--------------
(Registrant's telephone number, including area code)
N.A.
--------------------------------------------------------------
(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
----------------------------- -----
(Class) (Outstanding at July 31, 1996)
Page 1 of 21
PDV AMERICA, INC.
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 1996
Index
-----
Page
FACTORS AFFECTING FORWARD LOOKING STATEMENTS...................................3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets --
June 30, 1996 and December 31, 1995..................................4
Condensed Consolidated Statements of Operations --
Three Month Periods Ended June 30, 1996 and 1995 and
Six Month Periods Ended June 30, 1996 and 1995.......................5
Condensed Consolidated Statements of Cash Flows --
Six Month Periods Ended June 30, 1996 and 1995.......................6
Notes to the Condensed Consolidated Financial Statements..........7-11
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations.................12-19
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K....................................20
SIGNATURES
2
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 31E 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 product and capital resources
available to the Companies (as defined herein) are 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 Companies' 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 PDV America, Inc. believes that the
expectations reflected by such forward looking statements are reasonable based
on information currently available to the Companies, no assurances can be given
that such expectations will prove to have been correct.
3
PART I. FINANCIAL INFORMATION
- ------- ---------------------
PDV AMERICA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
June 30, December 31,
1996 1995
---------- ------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $26,486 $25,794
Short term investments 38,000 -
Accounts receivable, net 979,098 817,990
Due from affiliates 58,709 61,376
Inventories 952,401 785,275
Prepaid expenses and other 50,209 37,625
---------- ----------
TOTAL CURRENT ASSETS 2,104,903 1,728,060
NOTES RECEIVABLE FROM PDVSA 1,000,000 1,000,000
PROPERTY, PLANT AND EQUIPMENT, Net 2,641,638 2,492,146
RESTRICTED CASH 15,778 1,258
INVESTMENTS IN AFFILIATES 967,568 881,960
OTHER ASSETS 138,301 116,860
---------- ----------
TOTAL ASSETS $6,868,188 $6,220,284
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES
Short-term bank loans $105,000 $25,000
Accounts payable 460,346 438,664
Due to affiliates 285,808 176,800
Taxes other than income 193,586 173,915
Other current liabilities 257,135 241,796
Income taxes payable 588 6,068
Current portion of long-term debt 95,240 95,240
Current portion of capital lease obligation 11,150 10,562
--------- ----------
TOTAL CURRENT LIABILITIES 1,408,853 1,168,045
LONG-TERM DEBT 2,467,005 2,155,316
CAPITAL LEASE OBLIGATION 135,776 141,504
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS 175,672 167,905
OTHER NONCURRENT LIABILITIES 193,570 188,707
DEFERRED INCOME TAXES 436,355 400,137
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 27,148 25,618
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY
Common stock, $1 par, 1000 shares authorized,
issued and outstanding 1 1
Additional capital 1,232,435 1,232,435
Retained earnings 791,373 740,616
---------- ----------
TOTAL SHAREHOLDER'S EQUITY 2,023,809 1,973,052
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $6,868,188 $6,220,284
========== ==========
(See Notes to the Condensed Consolidated Financial Statements)
4
PDV AMERICA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in Thousands)
Three Month Period Ended Six Month Period Ended
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
----------------- ----------------- ----------------- -----------------
REVENUES:
Sales $3,246,330 $2,902,321 $5,813,072 $5,211,315
Sales to affiliates 87,666 49,823 128,119 98,311
---------- ---------- ---------- ----------
3,333,996 2,952,144 5,941,191 5,309,626
Equity in earnings (losses) of affiliates 16,129 16,134 25,536 28,730
Interest income from PDVSA 19,431 19,431 38,862 38,862
Other (loss) income, net (47) (257) (547) 3,150
---------- ---------- ---------- ----------
3,369,509 2,987,452 6,005,042 5,380,368
---------- ---------- ---------- ----------
COST OF SALES AND EXPENSES:
Cost of sales and operating expenses 3,229,290 2,849,693 5,750,391 5,087,184
Selling, general and administrative
expenses 33,487 39,637 77,874 74,509
Interest expense:
Capital leases 4,276 4,543 8,553 9,086
Other 44,147 43,884 85,730 83,472
Minority interest in earnings of
consolidated subsidiary 780 410 1,530 816
---------- ---------- ---------- ----------
3,311,980 2,938,167 5,924,078 5,255,067
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM 57,529 49,285 80,964 125,301
INCOME TAXES 21,527 18,529 30,207 46,530
---------- ---------- ---------- ----------
INCOME BEFORE EXTRAORDINARY
ITEM 36,002 30,756 50,757 78,771
EXTRAORDINARY ITEM:
Gain on early extinguishment of debt,
net of related income taxes of
$2,160 - - - 3,380
---------- ---------- ---------- ----------
NET INCOME $36,002 $30,756 $50,757 $82,151
========== ========== ========== ==========
(See Notes to the Condensed Consolidated Financial Statements)
5
PDV AMERICA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
Three Month Period Ended
June 30, June 30,
1996 1995
------------- -------------
CASH FLOWS (USED IN) PROVIDED BY OPERATING ACTIVITIES ($79,891) $73,147
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (217,097) (131,722)
Increase in restricted cash (14,520) (9,251)
Investments in LYONDELL-CITGO Refining Company, Ltd. (77,404) (146,118)
Investments in and advances to affiliates - (47,805)
Other 2,994 893
-------- --------
Net cash used in investing activities (306,027) (334,003)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings of revolving bank loans 105,000 165,001
Net proceeds from short-term bank loans 80,000 23,500
Proceeds from issuance of CITGO senior notes 199,699 -
Payments of term bank loans (14,706) -
Proceeds from issuance of tax-exempt bonds 25,000 90,700
Payments on tax-exempt bonds - (40,237)
Proceeds from master shelf agreement - 25,000
(Repayments) borrowings of other debt (3,572) 5,968
Capital contribution from parent - 15,000
Payments of capital lease obligations (5,311) (4,718)
-------- ---------
Net cash provided by financing activities 386,110 280,214
-------- --------
INCREASE IN CASH AND CASH EQUIVALENTS 692 19,358
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 25,794 22,642
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $26,486 $42,000
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $91,228 $92,294
======== ========
Income taxes $21,714 $34,633
======== ========
(See Notes to the Condensed Consolidated Financial Statements)
6
PDV AMERICA, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1996
1. Basis of Presentation
The financial information for PDV America, Inc. ("PDV America"
or the "Company") subsequent to December 31, 1995 and with respect to the
interim three and six month periods ended June 30, 1996 and 1995 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 and six month periods ended June 30, 1996 and 1995 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, 1995 on Form
10-K, dated March 29, 1996, for additional information.
The condensed consolidated financial statements include the
accounts of the Company, its wholly owned subsidiaries (including CITGO
Petroleum Corporation ("CITGO") and its wholly owned subsidiaries) and Cit-Con
Oil Corporation, which is 65 percent owned by CITGO (collectively, the
"Companies").
Effective January 1, 1996, the Company adopted Statement of
Financial Accounting Standards No. 121, "Accounting for Impairment of Long-lived
Assets and for Long-lived Assets to Be Disposed Of" ("SFAS 121"). SFAS 121
establishes the accounting for the impairment of long-lived assets, certain
identifiable intangibles and goodwill related to those assets to be held and
used and the accounting for long-lived assets and certain identifiable
intangibles to be disposed of. The adoption of SFAS 121 did not have a material
effect on the consolidated financial position or results of operations of the
Company.
Certain reclassifications have been made to the December 31,
1995 financial statements to conform with the classifications used at June 30,
1996.
2. Inventories
Inventories, primarily at LIFO, consist of the following:
7
June 30, December 31,
1996 1995
---------- ------------
(Unaudited)
(dollars in thousands)
Refined product..................................................... $715,893 $588,696
Crude oil........................................................... 190,216 149,414
Materials and supplies.............................................. 46,292 47,165
-------- --------
$952,401 $785,275
======== ========
3. Long-term Debt
June 30, December 31,
1996 1995
---------- ------------
(Unaudited)
(dollars in thousands)
7.25% Senior Notes $250 million face amount due 1998 $249,523 $249,420
7.75% Senior Notes $250 million face amount due 2000 250,000 250,000
7.875% Senior Notes $500 million face amount due 2003 496,797 496,633
Revolving bank loan 395,000 290,000
Term bank loan 102,941 117,647
Private Placement:
8.75% Series A Senior Notes due 1998 56,250 56,250
9.03% Series B Senior Notes due 2001 171,429 171,429
9.30% Series C Senior Notes due 2006 125,000 125,000
7.875% Senior Notes $200 million face amount due 2006 199,699 -
Master Shelf Agreement:
8.55% Senior Notes due 2002 25,000 25,000
8.68% Senior Notes due 2003 50,000 50,000
7.29% Senior Notes due 2004 20,000 20,000
8.59% Senior Notes due 2006 40,000 40,000
8.94% Senior Notes due 2007 50,000 50,000
7.17% Senior Notes due 2008 25,000 25,000
7.22% Senior Notes due 2009 50,000 50,000
Tax Exempt Bonds:
Pollution control revenue bonds due 2004 15,800 15,800
Port facilities revenue bonds due 2007 11,800 11,800
Louisiana wastewater facility revenue bonds due 2023 3,020 3,020
Louisiana wastewater facility revenue bonds due 2024 20,000 20,000
Louisiana wastewater facility revenue bonds due 2025 40,700 40,700
Gulf Coast solid waste facility revenue bonds due 2025 50,000 50,000
Gulf Coast solid waste facility revenue bonds due 2026 50,000 50,000
Port of Corpus Christi sewage and solid waste disposal
revenue bonds due 2026 25,000 -
Cit-Con bank credit agreement 39,286 42,857
---------- ----------
2,562,245 2,250,556
Less current portion of long-term debt (95,240) (95,240)
---------- ----------
$2,467,005 $2,155,316
========== ==========
8
In March 1996, CITGO issued $25 million of Port of Corpus Christi
Sewage and Solid Waste Disposal Revenue Bonds due 2026. On April 4, 1996, CITGO
filed a registration statement with the Securities and Exchange Commission
related to the shelf registration of $600 million of debt securities that may be
offered and sold from time to time. Pursuant to such registration statement, on
May 23, 1996, CITGO issued $200 million face amount of 7.875% Senior Notes due
2006.
4. Commitments and Contingencies
Litigation and Injury Claims. Various lawsuits and claims
arising in the ordinary course of business are pending against the Companies.
Included among these are (i) litigation with a contractor who is claiming
additional compensation for sludge removal and treatment at CITGO's Lake
Charles, Louisiana refinery; CITGO is seeking contractual penalties for
nonperformance and breach of contract and also a determination that a portion of
any damages awarded would be recoverable from a former owner; (ii) litigation
against the State of Louisiana concerning a potential assessment to CITGO and
other refiners of a use tax on petroleum coke which accumulates on catalyst
during refining operations and a change to the calculation of the sales/use tax
on fuel gas generated by refinery operations; and (iii) litigation against CITGO
by a number of current and former employees and applicants on behalf of
themselves and a class of similarly situated persons asserting claims under
Federal and State laws of racial discrimination in connection with the
employment practices at CITGO's Lakes Charles, Louisiana refining complex; the
plaintiffs have appealed the court's denial of class certification. The
Companies are vigorously contesting such lawsuits and claims and believe that
their positions are sustainable. The Company has recorded accruals for losses it
considers to be probable and reasonably estimable. However, due to uncertainties
involved in litigation, there are cases in which the outcome is not reasonably
predictable, and the losses, if any, are not reasonably estimable. If such
lawsuits and claims were to be determined in a manner adverse to the Companies,
and in amounts in excess of the Companies' accruals, it is reasonably possible
that such determinations could have a material adverse effect on the Companies'
results of operations in a given year. The term "reasonably possible" is used
herein to mean that the chance of a future transaction or event occurring is
more than remote but less than likely. However, based upon management's current
assessments of these lawsuits and claims and that provided by counsel in such
matters, and the capital resources available to the Companies, management of the
Companies believes that the ultimate resolution of these lawsuits and claims
would not exceed the aggregate of the amounts accrued in respect of such
lawsuits and claims and the insurance coverages available to the Companies by a
material amount and, therefore, should not have a material adverse effect on the
Companies' financial condition, results of operations or liquidity.
Environmental Compliance and Remediation. The Companies are
subject to various Federal, state and local environmental laws and regulations
which may require the Companies to take action to correct or improve the effects
on the environment of prior disposal or release of petroleum substances by the
Companies or other parties. Management believes the Companies are in compliance
with these laws and regulations in all material aspects.
9
Maintaining compliance with environmental laws and regulations in the future
could require significant capital expenditures and additional operating costs.
At June 30, 1996, the Companies had $59 million of
environmental accruals included in other noncurrent liabilities. Based on
currently available information, including the continuing participation of
former owners in remediation actions, management believes these accruals are
adequate. Conditions which require additional expenditures may exist for various
sites of the Companies including, but not limited to, CITGO's operating refinery
complexes, former refinery sites, 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. CITGO enters
into petroleum futures contracts primarily to reduce its inventory exposure to
market risk. CITGO also buys and sells commodity options for delivery and
receipt of crude oil and refined products. Such contracts are 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, therefore, will generally
be offset by gains and losses on CITGO's hedged inventory or future purchases
and sales.
CITGO has only limited involvement with other derivative
financial instruments, and does not use them for trading purposes. They are used
to manage well defined interest rate and commodity price risks arising out of
CITGO's core activities. PDV America itself has no involvement with derivative
financial instruments. CITGO has entered into various interest rate swap and cap
agreements to manage its risk related to interest rate changes on its debt. The
fair value of the interest rate swap agreements in place at June 30, 1996, based
on the estimated amount that CITGO would receive or pay to terminate the
agreement as of that date and taking into account current interest rates was an
unrealized gain of $1.5 million. In connection with the determination of said
fair market value, the Companies consider the credit worthiness of the
counterparties, but no adjustment was determined to be necessary as a result.
The impact of these instruments on costs of sales and
operating expenses and pretax earnings was immaterial for all periods presented.
Management believes that the market risk to the Company related to these
instruments was insignificant during the periods presented.
5. Related Party Transactions
CITGO has various crude oil and feedstock supply agreements
with subsidiaries of Petroleos de Venezuela, S.A. ("PDVSA"). Commencing in the
third quarter of 1995, certain deductible costs under certain of CITGO's supply
agreements were and will be deferred from 1995 and 1996 to the years 1997
through 1999. As a result of this deferral, crude costs for the first six months
and second quarter of 1996 were approximately $22 million and $11 million
higher, respectively, and crude costs for the full year 1996 are estimated to be
$45
10
million higher, than that which would otherwise have been payable. However, from
1997 through 1999, crude oil costs are estimated to decrease by approximately
$25 million per year as a result of the deferral and without giving effect to
other factors that may affect the price payable for crude oil under these
agreements.
In February 1996, the Company received from PDVSA an advance
of $38 million. Such advance, plus interest accrued thereon through July 31,
1996, was applied toward the payment of interest due on such date from PDVSA
under the Mirror Notes issued to the Company by PDVSA in connection with the
Company's $1 billion issuance of Senior Notes in August 1993. The proceeds of
such advance were included in Short term investments at June 30, 1996.
6. Subsequent Events and Other
On March 24, 1996, managerial, supervisory and other salaried
employees of The UNO-VEN Company ("UNO-VEN"), in which the Company has an
indirect 50% partnership interest, assumed operating and maintenance duties at
UNO-VEN's Lemont, Illinois refinery. UNO-VEN took this action after the Oil,
Chemical and Atomic Workers International Union Local 7-517 terminated the labor
contract extensions which had been in force since February 1, 1996 and rejected
UNO-VEN's proposals for a new contract. While UNO-VEN continues to be willing to
negotiate in good faith, the ultimate resolution of the issues involved in such
negotiations, and the timing thereof, cannot be predicted at this time. However,
UNO-VEN does not anticipate that its actions will result in any material adverse
effect on UNO-VEN's operations, and, to date, such actions have resulted in
safe, continuous and reliable operation of the refinery.
On July 25, 1996, CITGO issued $120 million of taxable
environmental revenue bonds due 2026. The bonds were issued at a variable rate
of interest, which was 5.429% on the date of issuance. The proceeds of this
offering will be used to repay existing debt.
11
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.
Petroleum industry operations and profitability are influenced
by a large number of factors, some of which individual petroleum refining and
marketing companies have little control over. Governmental regulations and
policies, particularly in the areas of taxation, energy and the environment,
have a significant impact on petroleum refining and marketing activities,
regulating how companies conduct their operations and formulate their products
and, in some cases, directly limiting their profits. Demand for crude oil and
refined products is largely driven by the condition of local and worldwide
economies, although weather patterns (including both seasonal and year-to-year
variations) and taxation relative to other energy sources also can be
significant. PDV America's consolidated operating results are affected by these
industry factors and by company specific factors, such as the success of
marketing programs and refinery operations.
The refining and marketing business is characterized by high
fixed costs resulting from significant capital investments associated with
refineries, terminals and related facilities. It is also characterized by
substantial fluctuations in variable costs related to costs of crude oil,
feedstocks and blending components, and substantial fluctuation in the prices
realized for refined products. Crude oil and refined products are commodities
whose price levels are determined by market forces beyond the control of the
Companies. Although an increase or decrease in the price of crude oil,
feedstocks or blending components generally results in a corresponding increase
or decrease in the price of refined products, there is usually a lag in the
realization of any such corresponding change. The effect of changes in crude oil
prices on PDV America's consolidated operating results depends in part on how
quickly refined product prices adjust to changes in crude oil, feedstock or
blending component prices. During the six months ended June 30, 1996, CITGO
purchased approximately two-thirds of its crude oil requirements under long-term
contracts with subsidiaries of PDVSA. These supply agreements are designed to
reduce the volatility of earnings and cash flows from CITGO's refining
operations by providing a relatively stable level of gross margin on the crude
oil supplied. However, CITGO purchased approximately one-third of its crude oil
requirements from other sources, which purchases were subject to market pricing
to varying degrees. In addition, CITGO purchases significant volumes of refined
products to supplement the production from its refineries to meet marketing
demands and resolve logistical problems. The sale of petrochemicals by CITGO
can, if market conditions are favorable, contribute significantly to PDV
America's consolidated income. However, petrochemical profit margins have
decreased during the first six months of 1996 from 1995 levels. Inflation was
not a significant factor in the operations of the Companies during 1995 or the
first six months of 1996.
12
Due to the seasonality of refined products markets and
refinery maintenance schedules, results of operations for the first six months
or the second quarter of a calendar year are not necessarily indicative of
results to be expected for a full year.
Results of Operations
The following table summarizes the sources of PDV America's
sales revenues:
PDV America Sales
Quarter Ended Six Months Ended Quarter Ended Six Months Ended
June 30, June 30, June 30, June 30,
-------------------- -------------------- --------------------- --------------------
1996 1995 1996 1995 1996 1995 1996 1995
-------- -------- -------- -------- -------- -------- -------- --------
($ in millions) (gallons in millions)
Gasoline $1,989 $1,902 $3,471 $3,314 2,902 2,961 5,411 5,551
Jet fuel 322 284 645 553 563 549 1,093 1,100
Diesel/#2 fuel 595 327 1,048 659 1,021 656 1,815 1,356
Petrochemicals,
industrial products
and other products 200 216 389 420 343 344 677 656
Asphalt 75 76 88 95 175 159 207 204
Lubricants and waxes 114 100 215 188 58 51 110 100
------ ------ ------ ------ ----- ----- ----- -----
Total refined
product sales $3,295 $2,905 $5,856 $5,229 5,062 4,720 9,313 8,967
Other sales 39 47 85 81 - - - -
------ ------ ------ ------ ----- ----- ----- -----
Total sales $3,334 $2,952 $5,941 $5,310 5,062 4,720 9,313 8,967
====== ====== ====== ====== ===== ===== ===== =====
The following table summarizes PDV America's cost of sales and
operating expenses:
PDV America Cost of Sales and Operating Expenses
Quarter Ended Six Months Ended
June 30, June 30,
---------------- -----------------
1996 1995 1996 1995
--------- -------- ------ -------
($ in millions)
Crude oil $765 $712 $1,382 $1,252
Refined products 2,016 1,707 3,394 2,891
Intermediate feedstocks 228 214 426 435
Refining and manufacturing 206 189 401 364
Other operating costs and expenses and
inventory changes 14 28 147 145
------ ------ ------ ------
Total cost of sales and operating expenses $3,229 $2,850 $5,750 $5,087
====== ====== ====== ======
13
Sales increased $382 million, or approximately 13%, in the
three month period ended June 30, 1996, and by $631 million, or 12%, in the six
month period ended June 30, 1996, as compared to the same periods in 1995. Total
sales volumes increased by 7%, from 4,720 million gallons to 5,062 million
gallons, in the second quarter of 1995 as compared to the second quarter of
1996, and increased by 4%, from 8,967 million gallons to 9,313 million gallons,
in the first six months of 1995 as compared to the first six months of 1996. The
increase in sales volumes, coupled with increases in most product sales prices,
resulted in the strong increase in revenues.
Sales volumes of light fuels (gasoline, diesel/#2 fuel and jet
fuel), excluding bulk sales made for logistical reasons, increased by 12% in the
second quarter of 1996 as compared to the second quarter of 1995, and increased
by 11% in the first six months of 1996 as compared to the same period in 1995.
Gasoline, jet fuel and diesel/#2 fuel, excluding bulk sales, had increases of
11%, 4% and 33%, respectively, in the second quarter of 1996 compared to the
second quarter of 1995. For the six month period ended June 30, 1996 versus the
same period in 1995, gasoline, jet fuel and diesel/#2 fuel sales volumes,
excluding bulk sales, had increases of 11%, 2% and 22%, respectively. Gasoline
sales volumes increased due to successful marketing efforts, including the net
addition of 799 independently-owned CITGO branded retail outlets since June 30,
1995, bringing the total number of CITGO branded retail outlets to 14,396 at
June 30, 1996 (17 of which are owned by CITGO).
Sales prices of gasoline, excluding bulk sales, have been
higher in 1996 than in 1995. The average increase for the second quarter of 1996
over the second quarter of 1995 is 4 cents per gallon, a 7% increase. Sales
prices of jet fuel and diesel/#2 fuel, excluding bulk sales, increased 8 cents
and 10 cents per gallon, respectively, or 15% and 19%, respectively, in the
second quarter of 1996 as compared to the same period in 1995. For the six month
period ended June 30, 1996, gasoline sales prices were approximately 7% higher,
jet fuel sales prices were about 17% higher and diesel/#2 fuel sales prices were
approximately 21% higher than for the same period in 1995.
To meet demand for its products and to manage logistics,
timing differences and product grade imbalances, CITGO purchases and sells
gasoline, diesel/#2 fuel and jet fuel from and to other refiners and in the spot
market. Such bulk sales decreased by $5 million, or less than 1%, from $758
million in the three month period ended June 30, 1995 to $753 million in the
same period in 1996, and by $117 million, or 9%, from $1,294 million in the six
month period ended June 30, 1995 to $1,177 million in the same period in 1996.
The decrease in revenues is a result of a 5% decrease in sales volumes partially
offset by a 4% increase in bulk sales prices between the quarters and a 15%
decrease in sales volumes partially offset by a 7% increase in bulk sales prices
between the six month periods. Despite the decrease in overall bulk sales
revenue, bulk sales revenue of diesel/#2 fuel increased by $159 million, or
109%, for the second quarter of 1996, and increased $201 million, or 74%, for
the six month period ended June 30, 1996, as compared to the same periods in
1995. The increases in diesel/#2 fuel bulk sales revenue are the result of an
80% increase in sales combined with a 16% increase in sales prices between the
quarters and a 49% increase in sales volumes combined with a 17% increase in
sales prices between the six month periods.
14
Petrochemicals and industrial products sales revenues
decreased 19% and increased 7%, respectively, for the three months ended June
30, 1996 as compared to the three months ended June 30, 1995, and decreased 22%
and increased 11%, respectively, for the six months ended June 30, 1996 versus
the six months ended June 30, 1995. Petrochemicals revenue decreases were the
result of a 20% decrease in unit sales prices combined with a 1% decrease in
sales volumes for the second quarter of 1996 and a 22% decrease in unit sales
prices combined with a less than 1% decrease in sales volumes for the six month
period ended June 30, 1996, as compared to the same periods in 1995. Industrial
products revenue increases were the result of a 7% increase in unit sales prices
and a less than 1% increase in sales volumes for the second quarter of 1996 and
5% increases in both unit sales prices and sales volumes for the six month
period ended June 30, 1996, as compared to the same periods in 1995.
Asphalt sales revenues in the second quarter of 1996 were $1
million lower while sales volumes were 10% higher, and in the first six months
of 1996 were $7 million lower while sales volumes were 1% higher, as compared to
the same periods in 1995. Asphalt sales prices decreased 10% in the second
quarter 1996 and 7% in the first six months of 1996, as compared to the same
periods in 1995.
Equity in earnings of affiliates, in the aggregate, remained
relatively stable for the three month period ended June 30, 1996, but decreased
$3.2 million for the six month period ended June 30, 1996, as compared to the
same periods in 1995. For the second quarter periods, equity in the earnings of
Nelson Industrial Steam Company ("NISCO") increased by $2.4 million, from a loss
of $2.6 million in the second quarter of 1995 to a loss of $0.2 million in the
second of 1996, while equity in the earnings of LYONDELL-CITGO Refining Company,
Ltd. ("LYONDELL-CITGO") decreased $1.7 million, from $2.6 million in the second
quarter of 1995 to $0.9 million in the second quarter of 1996, and equity in the
earnings of UNO-VEN decreased by $0.3 million. For the six month periods, the
decrease in 1996 from 1995 was primarily due to a $2.8 million decrease in the
equity in the earnings of LYONDELL-CITGO, from $7.3 million in 1995 to $4.4
million in 1996, and a $1.4 million decrease in equity in the earnings of
UNO-VEN, from $11.6 million in 1995 to $10.2 million in 1996, partially offset
by an increase in the equity in earnings of NISCO of $1.0 million, from a loss
of $3.3 million in 1995 to a loss of $2.3 million in 1996.
Other (loss) income, net was a loss of $0.5 million for the
six month period ended June 30, 1996 as compared to income of $3.2 million for
the same period in 1995. The difference is primarily due to a $2.4 million gain
on the termination of an interest rate swap agreement recognized in the first
six months of 1995.
Cost of sales and operating expenses increased by $379
million, or 13%, in the quarter ended June 30, 1996, and increased $663 million,
or 13%, in the six month period ended June 30, 1996, as compared to the same
periods in 1995. Higher crude oil costs (an increase from $712 million in the
second quarter of 1995 to $765 million in the second quarter of 1996) resulted
from a 7% increase in crude oil prices and a 1% increase in crude oil volumes
purchased. Crude oil costs increased from $1,252 million in the six month period
ended June 30, 1995 to $1,382 million in the first six months of 1996, the
result of a 10%
15
increase in crude oil prices and a less than 1% increase in crude oil volumes
purchased. Refined product purchases increased in 1996 as compared to the
comparable periods in 1995 (an 18% increase, from $1,707 million to $2,016
million, for the second quarter, and a 17% increase, from $2,891 million to
$3,394 million, for the first six months). These increases resulted from
increases in volumes purchased (an increase of 12% for the second quarter and 8%
for the first six months of 1996, as compared to the same periods in 1995), and
changes in prices (an increase of 6% for the second quarter and 8% for the first
six months of 1996, as compared to the same periods in 1995). Intermediate
feedstocks purchases also increased for the second quarter of 1996, to $228
million from $214 million in the second quarter of 1995, or an increase of 7%,
but decreased to $426 million for the first six months of 1996 from $435 million
for the first six months of 1995, or a decrease of 2%. Intermediate feedstock
volumes purchased increased 5% and prices increased 2% between the quarters
ended June 30, 1995 and June 30, 1996. Intermediate feedstock volumes purchased
decreased 6% and prices increased 4% between the six month periods ended June
30, 1995 and June 30, 1996. Refinery and manufacturing expenses increased for
both periods in 1996 as compared to 1995, 9% for the second quarter (from $189
million to $206 million), and 10% for the six month period ended June 30 (from
$364 million to $401 million). The increases in refining and manufacturing costs
are due primarily to increased costs of purchased fuel and electricity at
CITGO's Lake Charles and Corpus Christi refineries as well as the additional
manufacturing costs related to the lubricants plants acquired in May 1995.
Depreciation and amortization expense increased by $4 million, from $40 million
to $44 million for the quarters ended June 30, 1995 and 1996, respectively, and
by $8 million, from $80 million to $88 million for the six month periods ended
June 30, 1995 and 1996, respectively, due in both cases to increases in
depreciation offset by decreases in turnaround amortization. Increased capital
expenditures are expected to continue to result in increases in capital assets
with corresponding increases in depreciation expense.
CITGO purchases refined products to supplement the production
from its refineries to meet marketing demands and resolve logistical problems.
Refined product purchases represented 62% and 60% of total cost of sales and
operating expenses for the second quarter, and 59% and 57% for the first six
months, of 1996 and 1995, respectively. CITGO estimates that margins on
purchased products, on average, are somewhat lower than margins on produced
products due to the fact that CITGO can only receive the marketing portion of
the total margin received on the produced refined product. However, purchased
products are not segregated from CITGO 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. CITGO anticipates that its purchased refined
product requirements will continue to increase to meet marketing demands. In the
near term, other than normal refinery turnaround maintenance, CITGO does not
anticipate operational actions or market conditions which might cause a material
change in current trends in purchased product requirements. However, there could
be events beyond the control of CITGO which would impact the volumes of refined
products purchased.
Commencing in the third quarter of 1995, certain deductible
costs under certain of CITGO's supply agreements with subsidiaries of PDVSA were
and will be deferred from
16
1995 and 1996 to the years 1997 through 1999. As a result of this deferral,
crude costs for the second quarter of 1996 increased approximately $12 million
over such costs in the second quarter of 1995, and $22 million over such costs
in the first six months of 1995. It is estimated that crude costs will be
approximately $11 million higher for the third quarter of 1996 and approximately
$45 million higher for the year 1996 than what would otherwise have been
payable. However, from 1997 though 1999, crude oil costs are estimated to
decrease by approximately $25 million per year as a result of the deferral and
without giving effect to other factors that may affect the price paid for crude
oil under these agreements.
The gross margin for the three month period ended June 30,
1996 was $105 million, or 3.1%, compared to $102 million, or 3.5%, for the same
period in 1995. The gross margin for the six month period ended June 30, 1996
was $191 million, or 3.2%, compared to $222 million, or 4.2%, for the six month
period ended June 30, 1995. Gross margins in 1996 have been adversely affected
by scheduled modifications to the pricing provisions in the crude and feedstock
supply agreements, the decline in petrochemical profitability and increased
volumes of refined products purchased as a percentage of total sales volumes (in
each case, as discussed above).
Selling, general and administrative expenses decreased in the
second quarter of 1996 by 16%, from $40 million in the second quarter of 1995 to
$33 million in the second quarter of 1996, and increased 5% from $75 million in
the first six months of 1995 to $78 million in the same period in 1996. The
decrease between the quarters is primarily due to the difference in focus of
CITGO's marketing programs in the respective quarters. The primary program in
effect through March 1996 was designed to increase the number of CITGO branded
retail outlets and improve CITGO's overall image. Accordingly, costs were and
continue to be expensed as incurred. The program initiated in April 1996
primarily focuses on defending market share and increasing volumes sold to
existing distributors by providing an incentive which is earned over time. The
accounting for the new program recognizes the program expenses when the
incentives are earned.
Interest expense remained flat at $48 million for the second
quarter of 1996 and increased for the six month period ended June 30, 1996 by $1
million, or 2% (from $93 million to $94 million), as compared to the same
periods in 1995.
Income taxes for each period shown were based on an effective
tax rate of 37%.
The net income of $82 million for the six month period ended
June 30, 1995 includes an after tax extraordinary gain of $3.4 million on the
early extinguishment of certain CITGO tax exempt debt.
Liquidity and Capital Resources
For the six month period ended June 30, 1996, the Company's
consolidated net cash used in operating activities totaled approximately $79
million. Net income of $51 million and depreciation and amortization of $90
million were offset by net changes in other items of $220 million. The more
significant changes in other items included an increase in accounts
17
receivable, including due from affiliates, of approximately $164 million,
increases in inventory of $167 million and increases in prepaid expenses and
other assets of $74 million, which were partially offset by increases in
accounts payable, including due to affiliates, of $126 million and increases in
other liabilities of $53 million. The increase in accounts receivables is due
primarily to an increase in wholesale and credit card sales driven by increases
in both sales volumes and sales prices. Crude oil and refined products
inventories have increased from both year-end 1995 and the end of the first
quarter of 1996. These increases are due to normal seasonal demand fluctuations
for various products. The Company anticipates that inventory levels will be
reduced to approximate December 31, 1995 levels by the end of 1996.
Net cash used in investing activities of $306 million for the
six month period ended June 30, 1996 included capital expenditures of $217
million (compared to $132 million for the same period in 1995), additional
investment in LYONDELL-CITGO of $77 million (compared to $146 million for the
same period in 1995) and an increase in restricted cash of $15 million.
Net cash provided by financing activities of $386 million for
the six month period ended June, 30, 1996 included proceeds to CITGO of $80
million from short term borrowing facilities, additional proceeds during the
period of $105 million on its revolving bank facility debt and proceeds of $25
million on the revenue bond debt. CITGO also received proceeds of approximately
$200 million from the public offering of a tranche of debt securities from the
$600 million shelf registration statement filed with the SEC in April 1996.
Funds received from these financing activities were partially offset by net
repayments of $24 million on CITGO's term note and other debt.
As of June 30, 1996, capital resources available to the
Companies include cash generated by operations, available borrowing capacity
under CITGO's committed bank facilities of $280 million and $87 million of
uncommitted short term borrowing facilities with various banks. The Companies
believe that they have 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. CITGO
periodically evaluates other sources of capital in the marketplace and
anticipates long term capital requirements will be satisfied with current
capital resources and future financing arrangements. The Companies believe they
are in material compliance with their respective obligations under their
respective debt financing arrangements at June 30, 1996.
Derivative Commodity and Financial Instruments
CITGO enters into petroleum futures contracts primarily to
reduce its inventory exposure to market risk. CITGO also buys and sells
commodity options for delivery and receipt of crude oil and refined products.
Such contracts are 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, therefore, will generally be offset by gains and losses on CITGO's
hedged inventory or future purchases and sales.
18
CITGO has only limited involvement with other derivative
financial instruments, and does not use them for trading purposes. They are used
to manage well defined interest rate and commodity price risks arising out of
CITGO's core activities. PDV America itself has no involvement with derivative
financial instruments. CITGO has entered into various interest rate swap and cap
agreements to manage its risk related to interest rate changes on its debt. The
fair value of the interest rate swap agreements in place at June 30, 1996, based
on the estimated amount that CITGO would receive or pay to terminate the
agreement as of that date and taking into account current interest rates was an
unrealized gain of $1.5 million. In connection with the determination of said
fair market value, the Companies considered the creditworthiness of the
counterparties, but no adjustment was determined to be necessary as a result.
The impact of these instruments on costs of sales and
operating expenses and pretax earnings was immaterial for all periods presented.
Management believes that the market risk to the Company related to these
instruments was insignificant during the periods presented.
New Accounting Standard
Effective January 1, 1996, the Company adopted SFAS 121. SFAS
121 establishes the accounting for the impairment of long-lived assets, certain
identifiable intangibles and goodwill related to those assets to be held and
used and the accounting for long-lived assets and certain identifiable
intangibles to be disposed of. The adoption of SFAS 121 did not have a material
effect on the consolidated financial position or results of operations of the
Company.
19
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
--------
27 Financial Data Schedule (filed electronically only)
(b) Reports on Form 8-K:
-------------------
No reports on Form 8-K were filed during the quarter
for which this report is filed.
20
SIGNATURES
Pursuant to the requirements 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.
PDV AMERICA, INC.
Date: August 13, 1996 /s/ ALONSO VELASCO
------------------------------
Alonso Velasco
President, Chief Executive and
Financial Officer
Date: August 13, 1996 /s/ JOSE M. PORTAS
-------------------------------
Jose M. Portas
Secretary
21