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, 1997
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.
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(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
----------------------------- -----
(Class) (Outstanding at July 31, 1997)
Page 1 of 22 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 June 30, 1997
Table of Contents
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Page
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FACTORS AFFECTING FORWARD LOOKING STATEMENTS................................. 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets --
June 30, 1997 and December 31, 1996............................ 4
Condensed Consolidated Statements of Income --
Three Month Periods Ended June 30, 1997 and 1996 and
Six Month Periods Ended June 30, 1997 and 1996................. 5
Condensed Consolidated Statements of Cash Flows --
Six Month Periods Ended June 30, 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.............. 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................. 21
Item 6. Exhibits and Reports on Form 8-K.............................. 21
SIGNATURES.................................................................. 22
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)
JUNE 30, DECEMBER 31,
1997 1996
(Unaudited)
ASSETS:
CURRENT ASSETS
Cash and cash equivalents $ 24,370 $ 32,845
Accounts receivable, net 902,287 1,004,098
Due from affiliates 73,338 60,123
Inventories 1,184,427 833,191
Prepaid expenses and other 38,255 25,093
---------- ----------
TOTAL CURRENT ASSETS 2,222,677 1,955,350
NOTES RECEIVABLE FROM PDVSA 1,000,000 1,000,000
PROPERTY, PLANT AND EQUIPMENT - NET 3,404,023 2,786,941
RESTRICTED CASH 6,703 9,369
INVESTMENTS IN AFFILIATES 856,265 1,040,525
OTHER ASSETS 217,299 146,142
---------- ----------
TOTAL ASSETS $7,706,967 $6,938,327
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY:
CURRENT LIABILITIES
Short-term bank loans $ 88,000 $ 53,000
Accounts payable 479,694 530,758
Due to affiliates 263,008 275,551
Taxes other than income 249,814 200,863
Other current liabilities 362,693 237,115
Income taxes payable 2,856 21,137
Current portion of long-term debt 95,240 95,240
Current portion of capital lease obligation 12,440 11,778
---------- ----------
TOTAL CURRENT LIABILITIES 1,553,745 1,425,442
LONG-TERM DEBT 2,642,214 2,465,336
CAPITAL LEASE OBLIGATION 123,336 129,726
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS 203,201 183,370
OTHER NONCURRENT LIABILITIES 256,625 196,979
DEFERRED INCOME TAXES 446,367 399,768
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 27,363 26,631
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S EQUITY
Common stock, $1.00 par, 1,000 shares authorized,
issued and outstanding 1 1
Additional capital 1,482,435 1,232,435
Retained earnings 971,680 878,639
---------- ----------
TOTAL SHAREHOLDER'S EQUITY 2,454,116 2,111,075
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $7,706,967 $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 SIX MONTH PERIOD
ENDED ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1997 1996 1997 1996
----------- ----------- ----------- -----------
REVENUES:
Net sales $ 3,380,253 $ 3,284,450 $ 6,585,600 $ 5,848,409
Sales to affiliates 60,139 49,546 117,518 92,782
----------- ----------- ----------- -----------
3,440,392 3,333,996 6,703,118 5,941,191
Equity in earnings (losses)
of affiliates, net 8,343 16,129 20,134 25,536
Interest income from PDVSA 19,586 19,431 39,017 38,862
Other income (expense), net 907 (47) 1,623 (547)
----------- ----------- ----------- -----------
3,469,228 3,369,509 6,763,892 6,005,042
----------- ----------- ----------- -----------
COST OF SALES AND
EXPENSES:
Cost of sales and operating
expenses 3,255,776 3,229,290 6,433,535 5,750,391
Selling, general and
administrative expenses 54,369 33,487 96,718 77,874
Interest expense:
Capital leases 3,980 4,276 7,960 8,553
Other 50,935 44,147 97,471 85,730
Minority interest in earnings
of consolidated subsidiary 495 780 732 1,530
----------- ----------- ----------- -----------
3,365,555 3,311,980 6,636,416 5,924,078
----------- ----------- ----------- -----------
INCOME BEFORE INCOME
TAXES 103,673 $ 57,529 127,476 $ 80,964
INCOME TAXES 25,680 21,527 34,435 30,207
----------- ----------- ----------- -----------
NET INCOME $ 77,993 $ 36,002 $ 93,041 $ 50,757
=========== =========== =========== ===========
(See Notes to the Condensed Consolidated Financial Statements.)
5
PDV AMERICA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
SIX MONTH PERIOD
ENDED
JUNE 30, JUNE 30,
-------- --------
1997 1996
-------- --------
CASH FLOWS USED IN OPERATING ACTIVITIES ($140,075) ($ 79,391)
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures (124,342) (217,097)
Decrease (increase) in restricted cash 2,665 (14,520)
Investments in LYONDELL-CITGO Refining Company, Ltd. (45,635) (77,404)
Investments and advances to affiliates (717) --
Proceeds from sales of property, plant and equipment 11,980 2,994
--------- ---------
Net cash used in investing activities (156,049) (306,027)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings of revolving bank loans 175,000 105,000
Net proceeds from short-term bank loans 22,000 80,000
Proceeds from issuance of CITGO senior notes -- 199,699
Payments on term bank loans (14,706) (14,706)
Proceeds from issuance of tax-exempt bonds -- 25,000
Payments on senior notes of UNO-VEN (135,000) --
(Repayments) borrowings of other debt (3,571) (3,572)
Capital contribution from parent 250,000 --
Payments of capital leases (5,574) (5,311)
--------- ---------
Net cash provided by financing activities 288,149 386,110
--------- ---------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (7,975) 692
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 32,845 25,794
--------- ---------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 24,870 $ 26,486
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 103,927 $ 91,228
========= =========
Income taxes, net of refunds received $ 26,275 $ 21,714
========= =========
(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, 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 and six month periods ended June 30, 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- and six-month periods ended June 30, 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.
On April 21, 1997, Propernyn B.V. ("Propernyn"), a Dutch
limited liability company whose ultimate parent is Petroleos de Venezuela, S.A.
("PDVSA"), and which 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.
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), Cit-Con Oil
Corporation, which is 65 percent owned by CITGO, and VPHI Midwest, Inc.
("Midwest") and its wholly owned subsidiary, PDV Midwest Refining, L.L.C.
("PDVMR") (collectively, the "Companies").
Prior to May 1, 1997, Midwest had a 50 percent interest in The
Uno-Ven Company ("UNO-VEN"), an Illinois general partnership. Beginning May 1,
1997, pursuant to a distribution of assets from UNO-VEN as discussed in Note 7,
PDVMR now owns such former UNO-VEN assets (primarily the refining, distribution
and marketing assets), and such assets are now operated by CITGO under an
operating agreement between PDVMR and CITGO.
Certain reclassifications have been made to the June 30, 1996
financial statements to conform with the classifications used at June 30, 1997.
2. Accounts Receivable
During the second quarter of 1997, CITGO established a new
limited purpose subsidiary, CITGO Funding Corporation, which entered into an
agreement to sell, on an ongoing basis and without recourse, up to a maximum of
$125 million of trade accounts
7
receivable at any one point in time. This agreement has a minimum term of one
year expiring in June, 1998 and is renewable for successive one year terms by
mutual agreement. Fees and expenses relating to the agreement were recorded as
Other Income (Expense) and totaled approximately $354 thousand in the second
quarter of 1997. Proceeds received in June 1997 from the initial sale were used
primarily to make payments on the revolving bank loan.
3. Inventories
Inventories, primarily at LIFO, consist of the following:
June 30, December 31,
1997 1996
-------------- ----------
(Unaudited)
(000's Omitted)
Refined product............................. $851,274 $616,527
Crude oil................................... 262,448 165,564
Materials and supplies...................... 70,705 51,100
---------- --------
$1,184,427 $833,191
========== ========
8
4. Long-term Debt
June 30, December 31,
1997 1996
---- ----
(Unaudited)
(000's Omitted)
Senior Notes:
7.25% Senior Notes $250 million face amount due 1998 $ 249,743 $ 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 497,145 496,967
Shelf registration:
7.875% Senior Notes $200 million face amount, due 2006 199,730 199,715
Revolving bank loans:
Bank of America 450,000 350,000
Chase 75,000 --
Term bank loan 73,529 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
Illinois pollution control revenue bonds due 2008 19,850 --
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
Cit-Con bank credit agreement 32,143 35,714
----------- -----------
2,737,454 2,560,576
Less current portion of long-term debt (95,240) (95,240)
----------- -----------
$ 2,642,214 $ 2,465,336
=========== ===========
9
In connection with the formation of PDVMR, a new revolving
loan was established on April 28, 1997. The $125 million capacity revolving
loan, collateralized by inventory and receivables, has various borrowing
maturities and interest rate options, and is committed through April 28, 2002.
The loan contains certain covenants, including minimum debt to capital ratios,
and could impose limitations on distributions by PDVMR.
The Illinois pollution control revenue bonds are guaranteed by
a letter of credit.
5. Income Taxes
Income taxes were based on an effective tax rate of 27% for
the six-month period ended June 30, 1997, as compared to 37% for the comparable
period in 1996. The decrease is due primarily to the favorable resolution of a
significant tax issue with the Internal Revenue Service ("IRS") in the second
quarter of 1997. The resolution resulted in the reduction of a contingency
reserve previously established related to this matter. The decrease was
partially offset by the recording of a valuation allowance related to a capital
loss carryforward that will more likely than not expire in 1998.
6. 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 is 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 Lake
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.
In June 1997, CITGO settled litigation with a contractor who
had claimed additional compensation for sludge removal and treatment at CITGO's
Lake Charles, Louisiana refinery. The settlement did not have a material effect
on the Companies' financial position or results of operations. CITGO believes
that it has no further exposure to losses related to this matter.
On May 12, 1997 an explosion and fire occurred at CITGO's
Corpus Christi refinery. There were no reports of serious personal injuries.
Affected units were shut down for repair and are expected to be returned to full
service in early August, 1997. This event did not have a material adverse effect
on the Companies' financial condition or results of operations. There are five
lawsuits against CITGO pending in federal and state courts in Corpus Christi,
Texas alleging property damage and personal injury arising from the incident.
10
Additionally, there is a class action lawsuit pending against
CITGO and other operators and owners of nearby heavy industrial facilities which
was filed in state court in Corpus Christi, Texas in 1993 on behalf of property
owners in the vicinity of these facilities. This lawsuit asserts property damage
claims and diminution in property values allegedly resulting from environmental
contamination in the air, soil, and groundwater, occasioned by ongoing
operations of CITGO's Corpus Christi refinery and the respective industrial
facilities of the other defendants. The certification of the class action has
been appealed to the Texas Supreme Court by CITGO and other defendants. Two
related personal injury and wrongful death lawsuits were filed in 1996 and are
in preliminary stages of discovery at this time.
The lawsuits and claims against 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 and (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
where the third party plaintiff has made a claim for $1.0 million based on
alleged misrepresentations and on 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. The Company,
Midwest and PDVMR, jointly and severally, have agreed to indemnify UNO-VEN and
certain other related entities against certain liabilities and claims, including
the above matters.
Furthermore, in a case currently pending in the United States
District Court for the Northern District of Illinois, Oil Chemical & Atomic
Workers, Local 7-517 ("Local 7-517") amended its complaint against UNO-VEN to
assert claims against CITGO, PDVSA, the Company, PDVMR and Union Oil Company of
California pursuant to Section 301 of the Labor Management Relations Act
("LMRA"). In its amended complaint, Local 7-517, alleges that CITGO and the
other defendants constitute a single employer, joint employers or alter-egos for
the purposes of the LMRA, and are therefore bound by the terms of a collective
bargaining agreement between UNO-VEN and Local 7-517 covering certain production
and maintenance employees at a Lemont, Illinois petroleum refinery. On May 1,
1997, in a transaction involving the former partners of UNO-VEN, the Lemont
refinery was acquired by PDVMR. Pursuant to an operating agreement with PDVMR,
CITGO became the operator of the Lemont refinery, and employed the substantial
majority of employees previously employed by UNO-VEN pursuant to its initial
employment terms, but did not assume the existing labor agreement.
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
11
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 believes that the ultimate resolution of these lawsuits
and claims would not exceed by a material amount the aggregate of the amounts
accrued in respect of such lawsuits and claims and the insurance coverages
available to the Companies 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. Maintaining compliance
with environmental laws and regulations in the future could require significant
capital expenditures and additional operating costs.
At June 30, 1997, the Companies had $60 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 sites of the Companies including,
but not limited to, the Companies' 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.
Recent Developments Relating to Environmental Compliance.
Recent developments relating to environmental compliance and remediation matters
include the following: (i) on September 30, 1996, CITGO received a Notice of
Violation ("NOV") from the United States Environmental Protection Agency (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 oxygen
content. CITGO has agreed to settle the NOV for $15 thousand; and (ii) on July
2, 1997, the Executive Director of the Texas Natural Resource Conservation
Commission ("TNRCC") issued a Preliminary Report and Petition alleging that
CITGO Refining and Chemicals Co., L.P. ("CITGO Refining") violated the TNRCC's
rules relating to operating a hazardous waste management unit without a permit.
The Report recommended a penalty of $699 thousand. CITGO Refining disagrees with
these allegations and the proposed penalties and plans to contest the matter.
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
12
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 and PDVMR have only limited involvement with other
derivative financial instruments, and do not use them for trading purposes. They
are used to manage well defined interest rate and commodity price risks arising
out of their core activities. The Company itself has no involvement with
derivative financial instruments. CITGO and PDVMR have entered into various
interest rate swap and cap agreements to manage their risk related to interest
rate changes on their debt. The fair value of the interest rate swap agreements
in place at June 30, 1997, based on the estimated amount that CITGO and PDVMR
would receive or pay to terminate the agreement as of that date and taking into
account current interest rates, was an unrealized loss of $1.5 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 considers the market risk to the Company related to these instruments
to be insignificant during the periods presented.
7. Distribution of UNO-VEN Assets
Distribution of UNO-VEN Assets. On May 1, 1997, certain assets
and liabilities of UNO-VEN were transferred to PDV Midwest Refining L.L.C.
("PDVMR"), a subsidiary of the Company, as a result of the liquidation of the
Company's 50% ownership interest in UNO-VEN. The assets transferred to PDVMR
include UNO-VEN's 153-thousand barrel per day refinery in Lemont, Illinois, as
well as eleven product distribution terminals and 89 retail sites located in the
Midwest. CITGO now operates these facilities and purchases the products produced
at the refinery. 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.
In connection with the transaction, the Company received a
capital contribution of $250,000,000 from PDV Holding, the Company's parent.
This contribution was used, in part, to pay off UNO-VEN's senior notes and to
provide working capital.
The transaction, for accounting purposes, has been treated as
a purchase and, accordingly, the allocation of fair values to the underlying
assets and liabilities acquired is based upon the best information currently
available and is subject to adjustment pending receipt of other information.
Management, however, believes, that the final allocation will not be materially
different than that included in the accompanying condensed, consolidated
financial statements.
13
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 the Company should be read in conjunction with the
unaudited condensed consolidated financial statements of the Company included
elsewhere herein. Reference is made to the Company's Annual Report for the
fiscal year ended December 31, 1996 on Form 10-K, dated March 28, 1997, for
additional information and a description of factors which may cause substantial
fluctuations in the earnings and cash flows of the Company.
In the second quarter ended June 30, 1997, the Company
generated net income of $78.0 million on revenue of $3.5 billion compared to net
income of $36.0 million on revenues of $3.4 billion for the same period last
year. Net income for the six months ended June 30, 1997 was $93.0 million on
revenues of $6.8 billion in 1997 compared to net income of $50.8 on revenues of
$6.0 billion for the same period in 1996. This improvement is due primarily to
improved margins and the inclusion of the results of operations of the Lemont
refinery, formerly owned by UNO-VEN, on a consolidated basis since May 1, 1997;
in addition, a favorable resolution of a significant tax issue with the IRS in
the second quarter of 1997 contributed to this result. These positive factors
were offset to some extent by the lost production and the additional expenses
associated with a fire and explosion which occurred at the Corpus Christi
Refinery on May 12, 1997.
On May 1, 1997, UNO-VEN transferred certain assets and
liabilities to PDVMR in liquidation of the Company's 50 percent ownership
interest in UNO-VEN. The assets include a 153 thousand barrel per day refinery
in Lemont, Illinois, as well as eleven product distribution terminals and 89
retail sites located in the Midwest. Under an operating agreement between PDVMR
and CITGO, CITGO now operates these facilities and purchases the products
produced at the refinery.
Results of Operations
The following table summarizes the sources of PDV America's
sales revenues and sales volumes for the three-month and six-month periods ended
June 30, 1997 and 1996:
Three Months Six Months Three Months Six Months
Ended June 30, Ended June 30, Ended June 30, Ended June 30,
-------------- -------------- -------------- --------------
1997 1996 1997 1996 1997 1996 1997 1996
---- ---- ---- ---- ---- ---- ---- ----
($ in millions) (MM gallons)
Gasoline $1,952 $1,989 $3,773 $3,471 2,998 2,932 5,635 5,411
Jet fuel 286 322 647 645 504 563 1,055 1,093
Diesel/#2 fuel 600 595 1,274 1,048 1,087 1,021 2,156 1,815
Petrochemicals, industrial
products and other products 304 200 533 389 499 343 856 677
Asphalt 122 75 157 88 216 175 279 207
Lubricants and waxes 120 114 224 215 62 58 116 110
------ ------ ------ ------ ------ ------ ------ ------
Total refined products sale 3,384 3,295 6,608 5,856 5,366 5,092 10,097 9,313
Other sales 56 39 95 85
------ ------ ------ ------ ------ ------ ------ ------
Total sales $3,440 $3,334 $6,703 $5,941 5,366 5,092 10,097 9,313
====== ====== ====== ====== ====== ====== ====== ======
14
The following table summarizes PDV America's cost of sales and
operating expenses for the three-month and six-month periods ended June 30, 1997
and 1996:
PDV America Cost of Sales and Operating Expenses
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
1997 1996 1997 1996
---- ---- ---- ----
($ in millions) ($ in millions)
Crude oil $ 754 $ 765 $1,467 $1,382
Refined products 2,013 2,016 3,955 3,394
Intermediate feedstocks 244 228 529 426
Refining and manufacturing costs 211 206 411 401
Other operating costs and expenses and
inventory changes 34 14 72 147
------ ------ ------ ------
Total cost of sales and operating expenses $3,256 $3,229 $6,434 $5,750
====== ====== ====== ======
Sales Revenues and Volumes. Sales increased $106 million, or
approximately 3%, in the three-month period ended June 30, 1997, and by $762
million, or 13%, in the six-month period ended June 30, 1997 as compared to the
same periods in 1996. Total sales volumes increased by 6% from 5,062 million
gallons in the second quarter of 1996 to 5,366 million gallons in the second
quarter of 1997, and increased by 8% from 9,313 million gallons in the first six
months of 1996 to 10,097 million gallons in the first six months of 1997. The
increase in volumes, coupled with increases in most product sales prices,
resulted in the increase in revenues between the six-month periods.
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 1997 as compared to the second quarter of 1996, and increased by 8%
in the first six months of 1997 as compared to the same period in 1996.
Gasoline, diesel/#2 fuel and jet fuel, excluding bulk sales, had sales volume
increases of 11% and 30% and a decrease of 2%, respectively, in the second
quarter of 1997, compared to the second quarter of 1996. For the six-month
period ended June 30, 1997 versus the same period in 1996, gasoline, diesel/#2
fuel and jet fuel, excluding bulk sales, had sales volume increases of 7%, 20%
and 3%, respectively. Gasoline sales volumes increased due to successful
marketing efforts, including the net addition of 314 independently owned CITGO
branded retail outlets since June 30, 1996, bringing the total number of CITGO
branded retail outlets to 14,710 at June 30, 1997, substantially all of which
are independently owned.
Sales prices of gasoline, excluding bulk sales, were lower in the
second quarter of 1997 than in the second quarter of 1996. The average decrease
for the second quarter of 1997 over the second quarter of 1996 was 4 cents per
gallon, or a 6% decrease. Sales prices of jet fuel and diesel/#2 fuel, excluding
bulk sales, decreased 3 cents and 5 cents per gallon, respectively, or 5% and
8%, respectively, in the second quarter of 1997 as compared to the same period
in 1996. For the six-month period ended June 30, 1997, gasoline prices,
15
excluding bulk sales, were approximately 4% higher, jet fuel prices were
approximately 4% higher and diesel/#2 fuel prices were less than 1% lower than
for the same period in 1996.
To meet demand for its products and to manage logistics, timing
differences and product grade imbalances, the Company purchases and sells
gasoline, diesel/#2 fuel and jet fuel from and to other refiners and in the spot
market. Such bulk sales revenue decreased by $173 million, or 23%, from $753
million in the three-month period ended June 30, 1996 to $580 million in the
same period in 1997. The decrease is attributable to a 4% decline in prices and
a 20% decline in volumes. Such bulk sales revenue increased by $87 million or 7%
from $1,177 million in the six-month period ended June 30, 1996 to $1,264
million in the same period in 1997. The increase is attributable to a 6%
increase in prices and a 2% increase in volumes.
Petrochemicals and industrial products sales revenues increased 46%
and 76%, respectively, for the three months ended June 30, 1997 as compared to
the three months ended June 30, 1996, and increased 39% and 33%, respectively,
for the six months ended June 30, 1997 versus the six months ended June 30,
1996. The petrochemicals revenue increases were the result of an 8% increase in
unit sales price, and a 36% increase in volume for the second quarter of 1997
and a 15% increase in unit sales price and a 21% increase in volume for the
six-month period ended June 30, 1997, as compared to the same periods in 1996.
The industrial products revenue increases were the result of a 12% increase in
unit sales price and a 57% increase in volumes for the second quarter of 1997
and a 7% increase in unit sales price and a 24% volume increase for the
six-month period ended June 30, 1997, as compared to the same periods in 1996.
Asphalt sales revenues in the second quarter of 1997 were $47 million
higher and sales volumes were 23% higher than in the same period in 1996. Sales
revenues were $69 million higher, and sales volumes were 35% higher, in the
first six months of 1997 as compared to the same period in 1996. Asphalt sales
prices increased 32% in the second quarter of 1997, and 32% in the first six
months of 1997, from the same periods in 1996.
Equity in earnings (losses) of affiliates, net. Equity in earnings of
affiliates decreased by $7.8 million overall for the three-month period and
decreased $5.4 million overall for the six-month period ended June 30, 1997 as
compared to the same periods in 1996. For the second quarter periods, the
decrease was primarily due to the change in the equity in earnings of three
affiliates. Effective May 1, 1997, the Company is no longer a partner in the
UNO-VEN partnership, having received a distribution of assets from UNO-VEN
(primarily the refining, distribution and marketing assets). Since that date,
the results of operations from these assets have been included on a consolidated
basis. Equity in the earnings of UNO-VEN decreased from income of $9.2 million
in the second quarter of 1996 to a loss of $4.5 million in the same period in
1997 (which includes the operations only for the month of April 1997), and
equity in the earnings of Nelson Industrial Steam Company ("NISCO") decreased by
$1.3 million, from a loss of $0.1 million in the second quarter of 1996 to a
loss of $1.4 million in the second quarter of 1997. This was partially offset by
an increase of $7.9 million in equity in the earnings of LYONDELL-CITGO Refining
Company Ltd. ("LYONDELL-CITGO") (from $0.9 million in the second quarter of 1996
to $8.8
16
million in the second quarter of 1997). For the first six months, the decrease
in 1997 from 1996 was due primarily to a decrease in the equity in the earnings
of UNO-VEN of $9.7 million, from $10.2 million in the first six months of 1996
as compared to $0.5 million for the same period in 1997. This decrease was
partially offset by an increase in the equity in the earnings of LYONDELL-CITGO
which increased $5.5 million, from $4.4 million in the first six months of 1996
to $9.9 million in the first six months of 1997. This increase was due primarily
to the change in CITGO's interest in LYONDELL-CITGO which increased from 13% at
December 31, 1996 to approximately 42% on April 1, 1997. The increase in CITGO's
interest in LYONDELL-CITGO was offset by a decrease in LYONDELL-CITGO's earnings
due to lower refined product volumes, higher production and maintenance costs
and declines in the profitability of petrochemicals as compared to the second
quarter of 1996.
Other income (expense), net. Other income (expense) was $1.6 million
for the six-month period ended June 30, 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 $27 million, or 1%, in the quarter ended June 30, 1997,
and increased $683 million or 12%, in the six-month period ended June 30, 1997,
as compared to the same periods in 1996. Lower crude oil costs (a decrease from
$765 million in the second quarter of 1996 to $754 million in the second quarter
of 1997) resulted from a 6% decrease in crude prices and a 5% increase in crude
oil volumes purchased. Crude oil costs increased from $1,382 million in the
six-month period ended June 30, 1996 to $1,467 million in the first six months
of 1997, the result of a 4% increase in crude prices and a 2% increase in crude
oil volumes purchased. Refined product purchases decreased in the second quarter
of 1997 as compared to the same quarter in 1996 (down less than 1%, from $2,016
million to $2,013 million for the second quarter), and increased in the first
six months of 1997 as compared to the same period in 1996 (up 17%, from $3,394
million to $3,955 million, for the first six months). These changes resulted
from increases in refined product purchase volumes, (up 5% for the second
quarter and 12% for the first six months of 1997 as compared to the same periods
in 1996), and changes in prices (down 5% for the second quarter and up 4% for
the first six months of 1997 as compared to the same periods in 1996).
Intermediate feedstock purchases increased to $244 million from $228 million in
the second quarter of 1996, or an increase of 7%, and increased to $529 million
for the first six months of 1997 from $426 million for the first six months of
1996, or an increase of 24%. Intermediate feedstock volumes purchased increased
10%, and prices decreased 3% between the quarters ended June 30, 1996 and June
30, 1997. Intermediate feedstock volumes purchased increased 16% and prices
increased 7% between the six-month periods ended June 30, 1996 and June 30,
1997, respectively. Refining and manufacturing costs increased for both periods
in 1997 as compared to 1996, 2% for the second quarter (from $206 million to
$211 million), and 2% for the six-month period ended June 30 (from $401 million
to $411 million). CITGO incurred additional expenses associated with a fire and
explosion which occurred at the Corpus Christi refinery on May 12, 1997.
Depreciation and amortization expense increased from $44 million to $54 million
between the quarters ended June 30, 1996 and 1997, respectively, and from $88
million to $103 million between six-month periods ended June 30, 1996 and 1997,
17
respectively, due in both cases to significant capital projects formerly
classified as work in progress put into service during these 1997 reporting
periods.
The Company purchases refined products to supplement the production
from its refineries to meet marketing demands and resolve logistical issues.
Refined product purchases represented 62% of total cost of sales and operating
expenses for the second quarter of both 1997 and 1996, and 61% and 59% for the
first six months of 1997 and 1996 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. The Company 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, the Company 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 the Company which would impact the volume of refined products
purchased.
Gross margin. The gross margin for the three-month period ended June
30, 1997 was $184 million, or 5%, compared to $105 million, or 3%, for the same
period in 1996. The gross margin for the six-month period ended June 30, 1997
was $269 million, or 4%, compared to $191 million, or 3% for the six-month
period ended June 30, 1996. Gross margins in 1997 have been positively affected
by asphalt and petrochemical activities as well as generally improved operating
margins (in each case, as discussed above).
Selling, general and administrative expenses. Selling, general and
administrative expenses increased in the second quarter of 1997 by 63% , from
$33 million in the second quarter of 1996 to $54 million in the second quarter
of 1997, and increased 24% from $78 million in the first six months of 1996 to
$97 million in the same period in 1997. The increase during the second quarter
and the six months ended June 30, 1997 is primarily due to increased selling
expenses in 1997, including the effect of the change in focus of the Company's
marketing programs initiated in April 1996. In addition, selling, general and
administrative expenses increased in several other areas including purchasing,
legal, information systems, corporate executive, credit card and other charges,
none of which increased more than $4 million individually, but in the aggregate
increased approximately $13 million.
Interest expense. Interest expense increased $7 million, or 13% (from
$48 million to $55 million), for the second quarter ended June 30, 1997, and
increased year-to-date by approximately $11 million, or 12% (from $94 million to
$105 million), as compared to the same periods in 1996. This increase is
primarily due to the increase in the amount outstanding under CITGO's revolving
bank loan and senior notes.
Income taxes. Income taxes were based on an effective tax rate of 27%
for the six-month period ended June 30, 1997, as compared to 37% for the
comparable period in 1996.
18
The decrease is due primarily to the favorable resolution of a significant tax
issue with the IRS in the second quarter of 1997. The resolution resulted in the
reduction of a contingency reserve previously established related to this
matter. The decrease was partially offset by the recording of a valuation
allowance related to a capital loss carryforward that will more likely than not
expire in 1998.
Liquidity and Capital Resources
For the six-month period ended June 30, 1997, the Company's
consolidated net cash used in operating activities totaled approximately $140
million. Net income of $93 million and depreciation and amortization of $105
million were offset by net changes in other items of $338 million. The more
significant changes in other items included a decrease in accounts receivable
(including amounts due from affiliates) of $136 million, decreases in prepaid
expenses and other assets of $6 million and increases in deferred taxes of $2.8
million, offset by increases in inventory of $203 million, decreases in accounts
payable (including amounts due to affiliates) of $89 million, and increases in
other liabilities of $11 million. The decrease in accounts receivable is due
primarily to the sale of $125 million of accounts receivable in June 1997,
proceeds of which were used primarily to make payments on the revolving bank
loan. Refined products inventories have increased since the end of 1996 due to
increases in both volumes purchased and costs. The decrease in accounts payable
is due primarily to the purchase of inventories of an affiliated company for
which the amount due is included in a net receivable position due from the
affiliate.
Net cash used in investing activities of $156 million for the
six-month period ended June 30, 1997 included capital expenditures of $124
million (compared to $217 million for the same period in 1996), and an
additional investment in LYONDELL-CITGO of $46 million (compared to $77 million
for the same period in 1996). Net cash provided by financing activities of $288
million for the six-month period ended June 30, 1997 included net proceeds of
$22 million from short-term borrowing facilities, additional proceeds during the
period of $175 million on the revolving bank facilities and a capital
contribution of $250 million from PDV Holding, Inc. Funds received from these
financing activities were partially offset by the repayment of the $135 million
UNO-VEN senior notes and net repayments of $24 million on CITGO's term note and
other debt.
As of June 30, 1997, capital resources available to the Companies
included cash generated by operations, available borrowing capacity under
CITGO's committed bank facilities of $225 million and $127 million of
uncommitted short-term borrowing facilities with various banks. In addition,
PDVMR has available borrowing capacity of $50 million under a revolving bank
loan. Additionally, CITGO may offer and sell up to $400 million of debt
securities under a shelf registration filed with the Securities and Exchange
Commission which became effective in May 1996. 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
19
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 June 30, 1997.
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 the Company's hedged inventory or
future purchases and sales.
CITGO and PDVMR have only limited involvement with other derivative
financial instruments, and do not use them for trading purposes. They are used
to manage well defined interest rate and commodity price risks arising out of
their core activities. CITGO and PDVMR have entered into various interest rate
swap and cap agreements to manage their risk related to interest rate changes on
their debt. The fair value of the interest rate swap agreements in place at June
30, 1997, based on the estimated amount that CITGO and PDVMR would receive or
pay to terminate the agreements as of that date and taking into account current
interest rates was an unrealized loss of $1.5 million. In connection with the
determination of said fair market value, CITGO and PDVMR 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.
20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
For a description of certain recent developments, see Note 6 to the
Condensed Consolidated Financial Statements (unaudited) for the Three Month and
Six Month Periods Ended June 30, 1997, included in Part I hereof.
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 August 12, 1997. The report noted that on July 14, 1997, PDVSA
announced the beginning of its internal reorganization. A copy of the pertinent
release filed by PDVSA on Form 6-K was attached thereto as Exhibit 99.1.
21
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 14, 1997 /s/ ALONSO VELASCO
----------------------------
Alonso Velasco
President, Chief Executive and
Financial Officer
Date: August 14, 1997 /s/ JOSE M. PORTAS
----------------------------
Jose M. Portas
Secretary