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 March 31, 1997
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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
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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
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(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 April 30, 1997)
Page 1 of 20 Pages
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, 1997
Index
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Page
FACTORS AFFECTING FORWARD LOOKING STATEMENTS................................3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets --
March 31, 1997 and December 31, 1996...........................4
Condensed Consolidated Statements of Income --
Three Month Periods Ended March 31, 1997 and 1996..............5
Condensed Consolidated Statements of Cash Flows --
Three Month Periods Ended March 31, 1997 and 1996..............6
Notes to the Condensed Consolidated Financial Statements.......7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations..............13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................19
Item 5. Other Information.............................................19
Item 6. Exhibits and Reports on Form 8-K..............................19
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 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 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
- ------ ---------------------
Item 1. FINANCIAL STATEMENTS (UNAUDITED)
PDV AMERICA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
MARCH 31, DECEMBER 31,
1997 1996
---- ----
(Unaudited)
ASSETS:
CURRENT ASSETS
Cash and cash equivalents $ 16,587 $ 32,845
Accounts receivable, net 894,991 1,004,098
Due from affiliates 44,645 60,123
Inventories 918,423 833,191
Prepaid expenses and other 9,681 25,093
----------- -----------
TOTAL CURRENT ASSETS 1,884,327 1,955,350
NOTES RECEIVABLE FROM PDVSA 1,000,000 1,000,000
PROPERTY, PLANT AND EQUIPMENT - NET 2,800,667 2,786,941
RESTRICTED CASH 6,610 9,369
INVESTMENTS IN AFFILIATES 1,092,808 1,040,525
OTHER ASSETS 156,482 146,142
----------- -----------
TOTAL ASSETS $6,940,894 $6,938,327
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY:
CURRENT LIABILITIES
Short-term bank loans $12,000 $53,000
Accounts payable 445,809 530,758
Due to affiliates 254,002 275,551
Taxes other than income 189,333 200,863
Other current liabilities 221,019 237,115
Income taxes payable 14,906 21,137
Current portion of long-term debt 95,240 95,240
Current portion of capital lease obligation 11,778 11,778
----------- -----------
TOTAL CURRENT LIABILITIES 1,244,087 1,425,442
LONG-TERM DEBT 2,621,349 2,465,336
CAPITAL LEASE OBLIGATION 129,726 129,726
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS 179,973 183,370
OTHER NONCURRENT LIABILITIES 194,623 196,979
DEFERRED INCOME TAXES 418,145 399,768
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 26,868 26,631
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY
Common stock, $1.00 par, 1,000 shares authorized,
issued and outstanding 1 1
Additional capital 1,232,435 1,232,435
Retained earnings 893,687 878,639
----------- -----------
TOTAL SHAREHOLDER'S EQUITY 2,126,123 2,111,075
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $6,940,894 $6,938,327
========== ==========
(See Notes to the Condensed Consolidated Financial Statements)
4
PDV AMERICA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in Thousands)
THREE MONTH PERIOD
ENDED
MARCH 31, MARCH 31,
1997 1996
------ -----
REVENUES:
Net sales 3,205,347 2,563,959
Sales to affiliates 57,379 43,236
---------- ----------
3,262,726 2,607,195
Equity in earnings (losses) of affiliates, net 11,791 9,407
Interest income from PDVSA 19,431 19,431
Other income (expense), net 716 (500)
---------- ----------
3,294,664 2,635,533
---------- ----------
COST OF SALES AND EXPENSES:
Cost of sales and operating expenses 3,177,759 2,521,851
Selling, general and administrative expenses 42,349 43,637
Interest expense:
Capital leases 3,980 4,277
Other 46,536 41,583
Minority interest in earnings of
consolidated subsidiary 237 750
---------- ----------
3,270,861 2,612,098
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INCOME BEFORE INCOME TAXES 23,803 23,435
INCOME TAXES 8,755 8,680
NET INCOME $ 15,048 $ 14,755
========= =========
(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
MARCH 31, MARCH 31,
1997 1996
CASH FLOWS USED IN OPERATING ACTIVITIES $(37,958) $(18,220)
-------- --------
CASH FLOWS USED IN INVESTING ACTIVITIES
Capital expenditures (61,231) (100,400)
Decrease (increase) in restricted cash 2,759 (14,384)
Investments in LYONDELL-CITGO Refining Company, Ltd. (45,429) (40,547)
Other 10,664 2,211
-------- --------
Net cash used in investing activities (93,237) (153,120)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings of revolving bank loans 165,000 30,000
Net (repayments of) proceeds from short-term bank loans (41,000) 122,000
Payments of term bank loan (7,353) (7,353)
Proceeds from issuance of tax-exempt bonds - 25,000
Repayments of other debt (1,786) (1,786)
Proceeds from capital leases 76 85
-------- --------
Net cash provided by financing activities 114,937 167,946
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS (16,258) (3,394)
CASH AND CASH EQUIVALENTS, 32,845 25,794
BEGINNING OF PERIOD -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 16,587 $ 22,400
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 54,783 $ 61,633
======== ========
Income taxes $ 14,124 $ 4,901
======== ========
(See Notes to the Condensed Consolidated Financial Statements)
6
PDV AMERICA, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
THREE MONTH PERIOD ENDED MARCH 31, 1997
1. Basis of Presentation
The financial information for PDV America, Inc. ("PDV America"
or the "Company") subsequent to December 31, 1996 and with respect to the
interim three month periods ended March 31, 1997 and 1996 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, 1997 and 1996 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, 1996 on Form
10-K, dated March 28, 1997, 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").
Certain reclassifications have been made to the March 31, 1996
financial statements to conform with the classifications used at March 31, 1997.
2. Inventories
Inventories, primarily at LIFO, consist of the following:
March 31, December 31,
1997 1996
---------------- -----------
(Unaudited)
(000's Omitted)
Refined product........................... $680,137 $616,527
Crude oil................................. 185,688 165,564
Materials and supplies.................... 52,598 51,100
-------- ---------
$918,423 $833,191
======== ========
7
3. Long-term Debt
March 31, December 31,
1997 1996
----- ----
(Unaudited)
(000's Omitted)
Senior Notes:
7.25% Senior Notes $250 million face amount due 1998 $249,686 $249,631
7.75% Senior Notes $250 million face amount due 2000 250,000 250,000
7.875% Senior Notes $500 million face amount due 2003 497,056 496,967
Shelf registration:
7.875% Senior Notes $200 million face amount, due 2006 199,722 199,715
Revolving bank loan 515,000 350,000
Term bank loan 80,882 88,235
Private Placement:
8.75% Series A Senior Notes due 1998 37,500 37,500
9.03% Series B Senior Notes due 2001 142,857 142,857
9.30% Series C Senior Notes due 2006 113,637 113,637
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 25,000
Taxable Louisiana wastewater facility revenue bonds due 2026 120,000 120,000
Citi-Con bank credit agreement 33,929 35,714
---------- ----------
2,716,589 2,560,576
Less current portion of long-term debt (95,240) (95,240)
--------- ----------
$2,621,349 $2,465,336
========== ==========
8
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 of approximately $42 million, including interest and
profits, for sludge removal and treatment at CITGO's Lake Charles, Louisiana
refinery; a portion of any damages awarded would be paid by a former owner;
CITGO is seeking contractual penalties for nonperformance and breach of
contract; a trial is currently scheduled for 1998. (ii) 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 seek injunctive relief and monetary damages and have appealed the
Court's denial of class certification; the initial trials relating to this
litigation, previously scheduled for July 1997, are not currently included in
the trial docket.
The lawsuits and claims against the UNO-VEN Company
("UNO-VEN") include (i) arbitration proceedings initiated by Always Open
Franchising Corporation against UNO-VEN, alleging that it is entitled to recover
$2.5 million as liquidated damages for breach of contract; (ii) the case of
Francois Oil Company, Inc. v. Stop-N-Go of Madison, Inc. et al, pending in the
Circuit Court of Dane County, Wisconsin, in which UNO-VEN has been made a third
party defendant, and the third party plaintiff alleges on the basis of a variety
of indemnity theories that UNO-VEN is liable to reimburse the third party
plaintiff for any and all damages which may be recovered by the plaintiff from
the third party plaintiff; and (iii) the three claims resulting from UNO-VEN's
efforts to collect accounts receivable from Grubor Enterprises, a now-defunct
marketer in the Detroit, Michigan area, two of which have resulted in
litigation, as well as a claim by an attorney retained by UNO- VEN to assist in
the collection effort that UNO-VEN owes him approximately $120,000 under various
contingency fee arrangements. Additionally, in a pending matter, the complaint
has been amended by Local 7-517 of the International Oil, Chemical and Atomic
Workers ("OCAW"), which is the union that represents the collective bargaining
unit at UNO-VEN's Lemont refinery, claiming that CITGO and the Company, along
with others, should assume UNO-VEN's obligations under certain labor agreements.
The Companies are vigorously contesting or pursuing, as
applicable, such lawsuits and claims and believe that their positions are
sustainable. The Companies have recorded accruals for losses they consider to be
probable and reasonably estimable. However, due to uncertainties involved in
litigation, there are cases, including the significant matters noted above, 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
reporting period. 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
9
the capital resources available to the Companies, management of the Company
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 Matters. 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. Maintaining compliance
with environmental laws and regulations could require significant capital
expenditures and additional operating costs.
At March 31, 1997, the Companies had $54 million of
environmental accruals included in other noncurrent liabilities. Based on
currently available information, including the continuing participation of
former owners in remediation actions and other environmental related matters,
management believes these accruals are adequate. Conditions which require
additional expenditures may exist for various Company sites, including, but not
limited to, the Companies' 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.
Recent Developments Relating to Environmental Compliance.
Recent developments relating to environmental compliance and remediation matters
include the following: (i) during 1994 and 1995, CITGO Asphalt Refining Company
("CARCO") received two Notices of Violation and two Compliance Orders from the
U.S. Environmental Protection Agency (the "EPA") related to the operations of
certain units at CARCO's Paulsboro, New Jersey asphalt refinery. A Consent Order
resolving these issues was entered by a federal court in February 1997. Under
the terms of the Consent Order, CARCO paid a $1,230,000 penalty; the Consent
Order will terminate January 30, 1998; and (ii) on September 30, 1996, CITGO
received a Notice of Violation ("NOV") from the EPA, Washington, D.C., alleging
violations of the Clean Air Act in the Chicago-Gary-Lake County,
Illinois-Indiana-Wisconsin area, arising from the sale of gasoline that failed
to meet the applicable minimum or maximum applicable oxygen content. The EPA has
not yet proposed penalties; but CITGO anticipates the proposed penalty could
possibly exceed $100,000. CITGO does not expect that such penalties will have a
material adverse effect on the Companies' financial condition, results of
operations or liquidity.
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
10
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 March 31, 1997,
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 $0.3 million. In connection with the determination of said
fair market value, the Companies consider 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 not insignificant during any of the periods presented.
5. Subsequent Events
CITGO's interest in LYONDELL-CITGO Refining Company Ltd.
("LYONDELL-CITGO") at December 31, 1996 approximated 13%, which increased to
approximately 42% on April 1, 1997 in accordance with the agreements concerning
such interest. CITGO has an option, for 18 months after the completion date and
for an additional investment, to increase its participation interest up to a
maximum of 50%.
Distribution of UNO-VEN Assets. On May 1, 1997, UNO-VEN
transferred certain assets and liabilities to a PDV America affiliate in
liquidation of PDV America's 50% ownership interest in UNO-VEN. The assets
transferred to the PDV America affiliate include UNO-VEN's refinery in Lemont,
Illinois, lubricants blending plant in Cincinnati, Ohio, 12 light oils and
lubricants terminals located in the Midwest, a 25% interest in a needle coke
facility at the refinery, and 108 branded retail gasoline outlets. In addition,
a PDV America affiliate acquired Union Oil Company of California's ("Unocal")
hydrocarbon solvents marketing business, which sells solvents produced at the
Lemont refinery.
Propernyn B.V. ("Propernyn"), a Dutch limited liability
company whose ultimate parent is Petroleos de Venezuela S.A. ("PDVSA"), and who
held all of the Company's common stock, contributed its shares of the Company to
PDV Holding, Inc. ("PDV Holding"), a corporation organized under the laws of
Delaware, a subsidiary of Propernyn.
In connection with the transaction, the Company received a
capital contribution of $250,000,000 from PDV Holding, PDV America's parent.
11
The transaction, for accounting purposes, will be treated as a
purchase.
Other Matters. On May 12, 1997 an explosion and fire occurred
at CITGO's Corpus Christi Refinery. There were no reports of serious injuries to
workers in the plant. The affected units are not currently operating. The
Company is conducting an investigation into the cause of the event and the
extent of the resulting damage. The financial effects of this event are not
presently determinable.
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.
Petroleum industry operations and profitability are influenced
by a large number of factors, some of which individual petroleum refining and
marketing companies cannot entirely control. Governmental regulations and
policies, particularly in the areas of taxation, energy and the environment,
have a significant impact on petroleum activities, regulating how companies
conduct their operations and formulate their products, and, in some cases,
limiting their profits directly. PDV America's consolidated operating results
are affected by these industry factors and by Company-specific factors, such as
the success of wholesale marketing programs and refinery operations.
Demand for crude oil and refined products is largely driven by
the condition of local and worldwide economies, although weather patterns and
taxation relative to other energy sources also play a significant part. Due to
the seasonality of refined products markets and refinery maintenance schedules,
results of operations for any 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 and sales volumes for the three-month periods ended March 31,
1997 and 1996:
Three Months Three Months
Ended March 31, Ended March 31,
--------------- ---------------
1997 1996 1997 1996
---- ---- ---- ----
($ in millions) (MM gallons)
Gasoline $1,821 $1,482 2,637 2,509
Jet fuel 361 323 551 530
Diesel/#2 fuel 674 453 1,069 794
Petrochemicals, industrial products and
other products 229 189 357 334
Asphalt 35 13 63 32
Lubricants and waxes 104 101 54 52
------ ------ ------ ------
Total refined product sales $3,224 $2,561 4,731 4,251
Other sales 39 46
------ ------ ------ ------
Total sales $3,263 $2,607 4,731 4,251
===========================================================
The following table summarizes PDV America's cost of sales and
operating expenses for the three-month periods ended March 31, 1997 and 1996:
13
PDV America Cost of Sales and Operating Expenses
Three Months
Ended March 31,
-------------------------------------------
1997 1996
-------------------------------------------
($ in millions)
Crude oil $713 $617
Refined products 1,942 1,378
Intermediate feedstocks 285 197
Refining and manufacturing costs 200 195
Other operating costs and expenses and inventory changes 38 135
-------------------------------------------
Total cost of sales and operating expenses $3,178 $2,522
===========================================
Sales Revenues and Volumes. Sales increased $656 million, or
approximately 25%, in the three-month period ended March 31, 1997, as compared
to the same period in 1996. Total sales volumes increased by 11% from 4,251
million gallons in the first quarter of 1996 to 4,731 million gallons in the
first quarter of 1997. The increase in volumes, coupled with increases in most
product sales prices, resulted in the increase in revenues.
Sales volumes of light fuels (gasoline, diesel/#2 fuel and jet
fuel), excluding bulk sales made for logistical reasons, increased by 5% in the
first quarter of 1997 as compared to the first quarter of 1996. Gasoline, jet
fuel and diesel/#2 fuel, excluding bulk sales, had sales volume increases of 2%,
9% and 11%, respectively, in the first quarter of 1997, compared to the first
quarter of 1996. Gasoline sales volumes increased due to successful marketing
efforts, including the net addition of 397 independently owned CITGO branded
retail outlets since March 31, 1996, bringing the total number of CITGO branded
retail outlets to 14,556 at March 31, 1997 (17 of which are owned by CITGO).
Sales prices of gasoline, excluding bulk sales, have been
higher in the three-month period ended March 31, 1997 as compared to the same
period in 1996. The average increase for the first quarter of 1997 over the
first quarter of 1996 is 10 cents per gallon, or a 17% increase. Sales prices of
jet fuel and diesel/#2 fuel, excluding bulk sales, increased 7 cents and 5 cents
per gallon, respectively, or 13% and 8%, respectively, in the first quarter of
1997 as compared to the same period in 1996.
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 increased by $260 million, or 61%, from $424 million in
the three-month period ended March 31, 1996 to $684 million in the same period
in 1997. The increase in revenue for the quarter ended March 31, 1997 is a
result of an 18% increase in bulk sales prices and a 36% increase in volumes as
compared to the same period in 1996. Bulk sales revenue of diesel/#2 fuel alone
increased by $157 million, or 94%, for the first quarter ended March 31, 1997 as
compared to the same period in 1996. The increase in diesel/#2 fuel bulk sales
revenue is the result of
14
a 69% increase in volumes combined with a 15% increase in sales prices as
compared to the same period in 1996.
Petrochemicals and industrial products sales revenues
increased 32% and decreased 4%, respectively, for the three months ended March
31, 1997 as compared to the three months ended March 31, 1996. The
petrochemicals revenue increase for the quarter was the result of a 7% increase
in volume, and a 24% increase in unit sales price, as compared to the same
period in 1996. The industrial products revenue decrease was the result of a 5%
decrease in volumes for the first quarter of 1997 as compared to the same period
in 1996, partially offset by a less than 1% increase in unit sales price.
Asphalt sales in the first quarter of 1997 were $22 million
higher and sales volumes were 97% higher as compared to the same period in 1996.
Asphalt sales prices increased 37% in the first quarter of 1997, as compared to
the same period in 1996.
Equity in earnings (losses) of affiliates, net. Equity in
earnings of affiliates increased by $2.4 million overall for the three-month
period ended March 31, 1997 as compared to the same period in 1996. The increase
was primarily due to an increase in the equity in earnings of UNO-VEN of $3.9
million, from $1.0 million for the first three months of 1996 to $4.9 million
for the same period in 1997, and an increase in the equity in earnings of the
Nelson Industrial Steam Company ("NISCO") of $1.4 million, from a loss of $2.2
million in the first three months of 1996 to a loss of $0.8 million in the first
three months of 1997. These increases were partially offset by a decrease in the
equity in the earnings of LYONDELL-CITGO, which decreased $2.5 million, from
$3.6 million in the first quarter of 1996 to $1.1 million in the first quarter
of 1997. This decrease was due primarily to a decline in refining margins on
non-Venezuelan crude oil and declines in the profitability of petrochemicals and
lubricants.
Other income (expense), net. Other income (expense) was $0.7
million for the three-month period ended March 31, 1997 as compared to ($0.5)
million for the same period in 1996. The difference is primarily due to a $1.3
million gain on the sale of pipeline assets in the first three months of 1997.
Cost of sales and operating expenses. Cost of sales and
operating expenses increased by $656 million, or 26%, in the quarter ended March
31, 1997, as compared to the same period in 1996. Higher crude oil costs (an
increase from $617 million in the first quarter of 1996 to $713 million in the
first quarter of 1997) resulted from a 17% increase in crude prices, offset by a
1% decrease in crude oil volumes purchased. Refined product purchases increased
in 1997 as compared to the comparable period in 1996 (up 41%, from $1,378
million to $1,942 million). The increase resulted from an increase in refined
product purchase volumes (up 21% for the first quarter of 1997 as compared to
the same period in 1996), and an increase in prices (up 17% for the first
quarter of 1997 as compared to the same period in 1996). Intermediate feedstock
purchases increased to $285 million in the first quarter of 1997 from $197
million in the first quarter of 1996. Intermediate feedstock volumes purchased
increased 22%, and prices increased 18% between the quarters ended March 31,
1996 and March 31, 1997. Refining and manufacturing costs increased 3% in the
15
first quarter of 1997 as compared to the first quarter of 1996 (from $195
million to $200 million). Depreciation and amortization expense increased by $5
million, from $44 million to $49 million for the quarters ended March 31, 1996
and 1997, respectively, due to an increase in depreciation and turnaround
amortization. Increased capital expenditures are expected to continue to result
in increases in depreciation expense.
CITGO purchases refined products to supplement the production
from its refineries to meet marketing demands and resolve logistical issues.
Refined product purchases represented 61% and 55% of total cost of sales and
operating expenses for the first quarters of 1997 and 1996, respectively. CITGO
estimates that margins on purchased products, on average, are somewhat lower
than margins on produced products due to the fact that in selling purchased
products CITGO can only receive the marketing portion of the total margin
received on the produced refined products. However, purchased products are not
segregated from CITGO's 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 purchased product requirements. However, there could be events beyond
the control of CITGO which would impact the volume of refined products purchased
and profit margins. These would include, among others, events affecting
inflation levels, access to financing, regulatory burdens, prices, demand,
production processes, or costs of production due to costs of technology or
inputs. See "Factors Affecting Forward Looking Statements".
Gross margin. The gross margin for the three-month period
ended March 31, 1997 was $85 million, or 2.6%, compared to $85 million, or 3.3%,
for the same period in 1996. Gross margin percentage in 1997 has been adversely
affected by the increased volumes of refined products purchased as a percentage
of sales volume. In addition, unscheduled outages at both the Lake Charles
refinery and the Corpus Christi refinery reduced production of refined products.
In order to satisfy customer demand, it was necessary for CITGO to purchase
additional volumes of refined products.
Selling, general and administrative expenses. Selling, general
and administrative expenses in the first quarter of 1997 decreased by 3% in
comparison with the same period in 1996, from $44 million in the first quarter
of 1996 to $42 million in the first quarter of 1997.
Interest expense. Interest expense increased by approximately
$5 million, or 10% (from $46 million to $51 million), for the first quarter
ended March 31, 1997, as compared to the same period in 1996. The increase is
due primarily to an increase in the amount of debt outstanding in the first
quarter of 1997 as compared to the first quarter of 1996.
16
Income taxes. Income taxes reported were based on an effective
tax rate of 37% for the three-month period ended March 31, 1997 and 37% for the
comparable period in 1996.
Net income. The net income of $15 million for the three-month
period ended March 31, 1997 includes a gain on sale of assets from pipeline
operations of $0.8 million net of taxes.
Liquidity and Capital Resources
For the three-month period ended March 31, 1997, the Company's
consolidated net cash used in operating activities totalled approximately $38
million. Net income of $15 million and depreciation and amortization of $50
million were reduced by net changes in other items of $103 million. The more
significant changes in other items principally included a decrease in accounts
receivable (including amounts due from affiliates) of $120 million, which were
partially offset by decreases in accounts payable (including due to affiliates)
of $126 million, and increases in inventory of $85 million. The decrease in
accounts receivable is due primarily to a decrease in refined product and crude
oil receivables. The decrease in crude oil receivables is a result of a decrease
in crude oil sales volumes and prices. The decrease in refined product
receivables is due to a decrease in refined product sales volumes in March, 1997
as compared to December, 1996. Refined products inventories have increased
following typical declines in inventory balances at year-end despite decreases
in refined product prices during the first quarter as compared to year-end.
Crude oil inventories have increased due to unscheduled outages at both the
Corpus Christi and Lake Charles refineries. In addition, distillates inventory
remained higher than normal due to lower sales of fuel oil as a result of a
warmer than expected winter in the Northeast. The decrease in accounts payable
is due primarily to the decrease in crude oil volumes purchased an the related
costs.
Net cash used in investing activities of $93 million for the
three-month period ended March 31, 1997 principally included capital
expenditures of $61 million (compared to $100 million for the same period in
1996), additional investments in LYONDELL-CITGO of $45 million (compared to $41
million for the same period in 1996) and a decrease in restricted cash of $3
million.
Net cash provided by financing activities of $115 million for
the three-month period ended March 31, 1997 principally included proceeds of
$165 million from a revolving bank loan. Funds received from these financing
activities were partially offset by repayments of $41 million on short-term
borrowing facilities and net repayments of $7 million on the Company's term
loan, revolving bank loans and other debt.
As of March 31, 1997, capital resources available to the
Companies principally include cash generated by operations, available borrowing
capacity under CITGO's committed bank facilities of $160 million and $168
million of uncommitted short-term borrowing facilities with various banks.
Additionally, the remaining $400 million from CITGO's shelf registration with
the Securities and Exchange Commission for $600 million of
17
debt securities may be offered and sold from time to time. The Company believes
that it 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. CITGO
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. Of course, the Companies' ability to obtain such financings
will depend on numerous factors, including market conditions and the perceived
creditworthiness of the Companies at that time. See "Factors Affecting Forward
Looking Statements". The Companies believe that they are in material compliance
with their obligations under their debt financing arrangements at March 31,
1997.
In connection with the distribution of the assets of UNO-VEN
on May 1, 1997 (refer to Note 5, to the Condensed Consolidated Financial
Statements), the Company received a capital contribution of $250,000,000 from
PDV Holding, PDV America's parent.
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 March 31, 1997,
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 $0.3 million. In connection with the determination of said
fair market value, CITGO 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 considers the market risk to the Company related to these instruments
to be insignificant during the periods presented.
18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
For a description of certain recent developments, see Note 4,
to the Condensed Consolidated Financial Statements (unaudited) for the Three
Month Period Ended March 31, 1997, included in Part I hereof.
Item 5. Other Information
On May 1, 1997, UNO-VEN transferred certain assets and
liabilities to a PDV America affiliate in liquidation of PDV America's 50%
ownership interest in UNO-VEN. The assets transferred to the PDV America
affiliate include UNO-VEN's refinery in Lemont, Illinois, lubricants blending
plant in Cincinnati, Ohio, 12 light oils and lubricants terminals located in the
Midwest, a 25% interest in a needle coke facility at the refinery, and 108
branded retail gasoline outlets. In addition, a PDV America affiliate acquired
Unocal's hydrocarbon solvents marketing business, which sells solvents produced
at the Lemont refinery.
Propernyn B.V., a Dutch limited liability company whose
ultimate parent is PDVSA, and who held all of the Company's common stock,
contributed its shares of the Company to PDV Holding, Inc., a corporation
organized under the laws of Delaware, a subsidiary of Propernyn.
In connection with the transaction, the Company received a
capital contribution of $250,000,000 from PDV Holding, Inc., PDV America's
parent.
The transaction, for accounting purposes, will be treated as a
purchase.
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
A report on Form 8-K was filed with the Securities and
Exchange Commission on January 7, 1997. The report provided that, on December
26, 1996, PDVSA and CITGO separately announced that the registrant had signed a
letter of intent with Union Oil of California (UNOCAL) for the restructuring of
UNO-VEN's refining and marketing business. A copy of each of the pertinent press
releases was attached thereto as Exhibit 99.
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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: May 14, 1997 /s/ ALONSO VELASCO
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Alonso Velasco
President, Chief Executive and
Financial Officer
Date: May 14, 1997 /s/ JOSE M. PORTAS
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Jose M. Portas
Secretary