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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _______________
Commission file number 001-12138
PDV America, Inc.
(Exact name of registrant as specified in its charter)
Delaware 51-0297556
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
750 Lexington Avenue, New York, New York 10022
----------------------------------------------
(Address of principal executive office) (Zip Code)
(212) 753-5340
--------------
(Registrant's telephone number, including area code)
N.A.
----------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ___
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, $1.00 par value 1,000
----------------------------- -----
(Class) (Outstanding at April 30, 1998)
Page 1 of 21 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, 1998
Table of Contents
Page
----
FACTORS AFFECTING FORWARD LOOKING STATEMENTS...................................3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets --
March 31, 1998 and December 31, 1997............................4
Condensed Consolidated Statements of Income --
Three-Month Periods Ended March 31, 1998 and 1997...............5
Condensed Consolidated Statements of Cash Flows --
Three-Month Periods Ended March 31, 1998 and 1997...............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..............................................19
Item 6. Exhibits and Reports on Form 8-K...............................20
SIGNATURES....................................................................21
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,
1998 1997
----------- -------------
(Unaudited)
ASSETS:
CURRENT ASSETS
Cash and cash equivalents $ 38,776 $ 35,268
Accounts receivable, net 591,650 666,264
Due from affiliates 35,659 55,883
Inventories 954,623 1,000,498
Current portion of notes receivable from PDVSA 250,000 250,000
Prepaid expenses and other 31,283 20,872
---------- ----------
TOTAL CURRENT ASSETS 1,901,991 2,028,785
NOTES RECEIVABLE FROM PDVSA 750,000 750,000
PROPERTY, PLANT AND EQUIPMENT - NET 3,419,784 3,427,983
RESTRICTED CASH 982 6,920
INVESTMENTS IN AFFILIATES 837,679 841,323
OTHER ASSETS 195,560 188,511
----------- -----------
TOTAL ASSETS $ 7,105,996 $ 7,243,522
============= ==============
LIABILITIES AND SHAREHOLDER'S EQUITY:
CURRENT LIABILITIES
Short-term bank loans $ 80,000 $ 3,000
Accounts payable 425,533 491,977
Due to affiliates 143,424 231,152
Taxes other than income 248,839 180,143
Other current liabilities 231,807 275,086
Income taxes payable 32,580 -
Current portion of long-term debt 345,160 345,099
Current portion of capital lease obligation 13,140 13,140
---------- ----------
TOTAL CURRENT LIABILITIES 1,520,483 1,539,597
LONG-TERM DEBT 1,905,870 2,047,708
CAPITAL LEASE OBLIGATION 116,586 116,586
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS 201,081 199,765
OTHER NONCURRENT LIABILITIES 253,569 234,710
DEFERRED INCOME TAXES 505,718 487,727
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 28,294 28,337
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 1,482,435
Retained earnings 1,091,959 1,106,656
------------- -------------
TOTAL SHAREHOLDER'S EQUITY 2,574,395 2,589,092
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 7,105,996 $ 7,243,522
============= =============
(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, 1998 MARCH 31, 1997
---------------- --------------
REVENUES:
Net sales $ 2,697,822 $ 3,205,347
Sales to affiliates 51,124 57,379
---------- ----------
2,748,946 3,262,726
Equity in earnings (losses) of affiliates, net 27,117 11,791
Interest income from PDVSA 19,431 19,431
Other income (expense), net 646 716
--------- -------
2,796,140 3,294,664
------------- -------------
COST OF SALES AND EXPENSES:
Cost of sales and operating expenses (including purchases 2,536,189 3,177,759
of $1,149,948 and $972,205 from affiliates)
Selling, general and administrative expenses 60,282 42,349
Interest expense:
Capital leases 3,649 3,980
Other 43,374 46,536
Minority interest in earnings of
consolidated subsidiary (42) 237
------- -------
2,643,452 3,270,861
------------- -------------
INCOME BEFORE INCOME TAXES 152,688 23,803
INCOME TAXES 57,350 8,755
---------- ---------
NET INCOME $ 95,338 $ 15,048
========== ==========
(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, 1998 MARCH 31, 1997
-------------- --------------
CASH FLOWS PROVIDED BY (USED BY) OPERATING $ 222,233 $ (37,958)
----------- -----------
ACTIVITIES
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (56,229) (61,231)
Decrease (increase) in restricted cash 5,938 2,759
Investments in LYONDELL-CITGO Refining Company, Ltd. - (45,429)
Loans to LYONDELL-CITGO Refining Company, Ltd. (7,000) -
Investments in and advances to affiliates (1,493) -
Proceeds from sale of investment 7,160 -
Other 7,831 10,664
----------- -----------
Net cash used in investing activities (43,793) (93,237)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments) borrowings of revolving bank loans (132,801) 165,000
Net proceeds from (repayments of) short-term bank loans 77,000 (41,000)
Payments on term bank loans (7,353) (7,353)
Dividend to parent (110,000) -
Repayments of other debt (1,778) (1,786)
Proceeds from capital lease obligations - 76
----------- ------
Net cash used in financing activities (174,932) (114,937)
----------- -----------
INCREASE (DECREASE) IN CASH AND CASH 3,508 (16,258)
EQUIVALENTS
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD 35,268 32,845
----------- ----------
CASH AND CASH EQUIVALENTS, $ 38,776 $ 16,587
=========== ==========
END OF PERIOD
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 52,121 $ 54,783
========== ==========
Income taxes, net of refunds received $ 356 $ 14,124
========== ==========
(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, 1998
1. Basis of Presentation
The financial information for PDV America, Inc. ("PDV America"
or the "Company") subsequent to December 31, 1997 and with respect to the
interim three-month periods ended March 31, 1998 and 1997 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, 1998 and 1997 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, 1997 on Form
10-K, dated March 30, 1998, 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 and its wholly owned subsidiaries ("CITGO")), 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, PDVMR now owns such
former UNO-VEN assets (as defined in related agreements), and such assets are
now operated by CITGO under an operating agreement between PDVMR and CITGO.
Accordingly, the consolidated financial statements reflect the equity in
earnings of UNO-VEN for the three-month period ended March 31, 1997 and the
results of operations of PDVMR on a consolidated basis for the three-month
period ended March 31, 1998.
Effective January 1, 1998, the Company adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income". The
Company had no items of other comprehensive income during the three-month
periods ended March 31, 1998 and 1997.
7
Certain reclassifications have been made to the March 31, 1997
financial statements to conform with the classifications used at March 31, 1998.
2. Inventories
Inventories, primarily at LIFO, consist of the following:
March 31, December 31,
1998 1997
--------------------------------------------
(Unaudited)
(000's Omitted)
Refined products................... $ 676,976 $ 734,261
Crude oil.......................... 209,668 196,349
Materials and supplies............. 67,979 69,888
----------- ----------
$ 954,623 $ 1,000,498
=========== ===========
8
3. Long-term Debt
March 31, December 31,
1998 1997
----------- -------------
(Unaudited)
(000's Omitted)
Senior Notes:
7.25% Senior Notes $250 million face amount due 1998 $ 249,924 $ 249,859
7.75% Senior Notes $250 million face amount due 2000 250,000 250,000
7.875% Senior Notes $500 million face amount due 2003 497,424 497,330
Revolving Bank Loans:
Bank of America 35,000 135,000
Chase 89,199 122,000
Term Bank Loan 51,470 58,823
Shelf Registration:
7.875% Senior Notes $200 million face amount, due 2006 199,752 199,745
Private Placement:
8.75% Series A Senior Notes due 1998 18,750 18,750
9.03% Series B Senior Notes due 1998 to 2001 114,286 114,286
9.30% Series C Senior Notes due 1998 to 2006 102,273 102,273
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 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
Louisiana wastewater facility revenue bonds due 2026 2,000 2,000
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 118,000 118,000
Cit-Con bank Credit Agreement 26,786 28,571
-------------- ------------
2,251,030 2,392,807
Less Current Portion of Long-term Debt (345,160) (345,099)
-------------- ------------
$ 1,905,870 $ 2,047,708
============== ============
On April 29, 1998, CITGO issued $25 million of Gulf Coast
Industrial Development Authority Solid Waste Disposal Revenue Bonds due 2028.
9
4. Commitments and Contingencies
Litigation and Injury Claims - Various lawsuits and claims
arising in the ordinary course of business are pending against the Companies.
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 the uncertainties involved in litigation,
there are cases, including the significant matters noted below, 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 the
capital resources available to the Companies, management of the Companies
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.
Included among these lawsuits and claims 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 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 are not
currently included in the trial docket.
In a case currently pending in the United States District
Court for the Northern District of Illinois, Oil Chemical and Atomic Workers,
Local 7-517 ("Local 7-517") amended its complaint against UNO-VEN to assert
claims against CITGO, PDVSA, the Company, PDVMR and UNOCAL pursuant to Section
301 of the Labor Management Relations Act ("LMRA"). This complaint alleges that
CITGO and the other defendants constitute a single employer, joint employers or
alter-egos for 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 transferred to 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 terms and conditions of employment, but did not assume the existing
labor agreement. The union seeks compensation for monetary differences in
medical, pension and other benefits between the
10
CITGO and UNO-VEN plans and reinstatement of all of the UNO-VEN benefit plans.
The union also seeks to require CITGO to abide by the terms of the collective
bargaining agreement between the union and UNO-VEN. As an alternative claim
against all defendants but CITGO, the union alleges that if the labor agreement
is not binding on CITGO, there was a violation of the Federal Workers Adjustment
Retraining and Notification Act by failure to give 60 days' written notice of
termination to approximately 400 UNO-VEN employees; this would allegedly entitle
such workers to 60 days' pay and benefits, which is estimated to be
approximately $6 million.
PDVMR, Midwest and PDV America, jointly and severally, have
agreed to indemnify UNO-VEN and certain other related entities against certain
liabilities and claims, including the preceding two matters.
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 were returned to full service in
early August 1997. CITGO has property damage, business interruption and general
liability insurance which related to this event. As a result, the property
damage and business interruption did not have a material adverse effect on the
Companies' financial condition or results of operations. There are presently
five lawsuits against CITGO pending in federal and state courts in Corpus
Christi, Texas, alleging property damages, personal injury and punitive damages
allegedly arising from the incident and other similar lawsuits have been
threatened. Approximately 6,000 individual claims have been received by the
Company allegedly arising from the incident.
Additionally, there is a class action lawsuit pending against
CITGO and other operators and owners of nearby 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. The certification of this case as a
class action in 1995 was appealed by CITGO and other parties. 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. Two related personal
injury and wrongful death lawsuits were filed in 1996 and are in preliminary
stages of discovery at this time. In 1997, CITGO signed an agreement to settle
the property damage class action lawsuit for approximately $17.3 million, which
included the purchase of approximately 290 properties in an adjacent
neighborhood. Of this amount, $15.7 million was expensed in 1997.
CITGO submitted a settlement proposal to the court. The court
appointed a guardian to review the proposed settlement terms. Subsequently, the
Texas Supreme Court decided to hear CITGO's appeal of the trial court's class
certification order. This decision raised questions as to whether the trial
court had authority to proceed with the settlement. Additionally, the trial
court sought to impose additional conditions upon the settlement, which were
unacceptable to CITGO. For these reasons, CITGO opposed the approval and
enforcement of the settlement agreement as proposed to be revised, and
enforcement has now
11
been stayed pending a ruling by the Texas Supreme Court. If the settlement
agreement is enforced, CITGO could be liable for the full settlement amount of
$17.3 million less amounts related to properties acquired pursuant to a
previously announced independent purchase program. CITGO has entered into
agreements to acquire approximately 88% of the properties which were the subject
of the purchase provisions of the settlement agreement and to settle the related
property damage claims. Closings of these transactions are expected to occur
within the next twelve months.
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 respects. Maintaining compliance
with environmental laws and regulations in the future could require significant
capital expenditures and additional operating costs.
At March 31, 1998, the Companies had $58 million of
environmental accruals included in other noncurrent liabilities. Based on
currently available information, including the continuing participation of
former owners in remediation actions, management believes these accruals are
adequate. Conditions which require additional expenditures may exist for various
Companies' sites, 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.
Derivative Commodity and Financial Instruments -- The
Companies enter into petroleum futures contracts primarily to reduce their
inventory exposure to market risk. The Companies also buy and sell 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 Companies' hedged
inventory or future purchases and sales. Non-hedging activity in the first
quarter of 1998 resulted in an immaterial gain that was recorded in the current
period.
The Companies have only limited involvement with other
derivative financial instruments and generally do not use them for trading
purposes. Generally, they are used to manage well-defined interest rate and
commodity price risks arising out of the Companies' core activities. The
Companies 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 March 31, 1998, based on the
estimated amount that the Companies would receive or pay to terminate the
agreements as of that date and taking into account current interest rates, was
an unrealized loss of $3.0 million. In connection with the determination of said
fair market value, the Companies consider the
12
creditworthiness of the counterparties, but no adjustment was determined to be
necessary as a result.
The impact of these instruments on cost of sales and operating
expenses and pretax earnings was immaterial for all periods presented.
Management considers the market risk to the Companies related to these
instruments to be insignificant during the periods presented.
5. Related Party Transactions
On April 8, 1998, PDVSA Petroleo y Gas, S.A. notified CITGO and other
companies to whom it supplies crude oil of reductions in crude production as
well as a declaration of force majeure on its long-term crude supply contracts
pursuant to orders from the government of the Republic of Venezuela. The impacts
on CITGO include (i) a 25,000 barrel per day reduction in crude supply to its
asphalt refineries; (ii) an increase in the specific gravity of the crude oil
supplied to its other refineries which precludes optimal use of the Company's
refining facilities; and (iii) an increase in the specific gravity of the crude
oil supplied to LYONDELL-CITGO which precludes optimal use of its refining
facilities. With respect to its asphalt operations, CITGO is attempting to
secure alternate asphalt supplies. With respect to its light fuels refineries,
CITGO is attempting to minimize the effect of the change in specific gravity by
seeking alternate supplies and by adjusting its operations. It is not possible
to determine the effect of this development on CITGO's operations because of the
uncertainties concerning CITGO's ability to mitigate the impact of the actions
described above and the duration of this situation.
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, 1997 on Form 10-K, dated March 30, 1998, for
additional information and a description of factors which may cause substantial
fluctuations in the earnings and cash flows of the Company.
In the first quarter ended March 31, 1998 the Company
generated net income of $95 million on revenue of $2.8 billion compared to net
income of $15 million on revenues of $3.3 billion for the same period last year.
This improvement is due primarily to a general decline in the cost of goods
sold, especially reductions in the cost of crude oil, relative to the selling
price of refined products.
CITGO's revenue accounted for over 99% of PDV America's
consolidated revenues in the first three months of 1998 and 1997. PDVMR's sales
of $277 million for the three- month period ended March 31, 1998 were primarily
to CITGO and, accordingly, these were eliminated in consolidation. However, the
operations of PDVMR, including its investment in a needle-coker company
("Needle-Coker"), contributed approximately $26 million to the Companies'
consolidated gross margin and $24 million to PDV America's consolidated income
before interest and taxes for 1998.
Results of Operations
The following table summarizes the sources of PDV America's
sales revenues and sales volumes for the three-month periods ended March 31,
1998 and 1997;
Three Months Three Months
Ended March 31, Ended March 31,
-------------------------------- --------------------------------
1998 1997 1998 1997
---------------- -------------- ---------------- --------------
($ in millions) (MM gallons)
Gasoline $ 1,580 $ 1,821 3,159 2,637
Jet fuel 204 361 428 551
Diesel/#2 fuel 524 674 1,158 1,069
Petrochemicals, industrial products
and other products 255 229 516 357
Asphalt 23 35 52 63
Lubricants and waxes 108 104 55 54
------------ ------------ ------------ ------------
Total refined products sales 2,694 3,224 5,368 4,731
Other sales 55 39
------------ ------------ ------------ ------------
Total sales $ 2,749 $ 3,263 5,368 4,731
============ ============ ============ ============
14
The following table summarizes PDV America's cost of sales and
operating expenses for the three-month periods ended March 31, 1998 and 1997:
Three Months
Ended March 31,
---------------
1998 1997
---- ----
($ in millions)
Crude oil $ 659 $ 713
Refined products 1,187 1,942
Intermediate feedstocks 264 285
Refining and manufacturing costs 234 194
Other operating costs and expenses
and inventory changes 192 44
------- ------
Total costs of sales and operating expenses $ 2,536 $ 3,178
========== =========
Sales revenues and volumes. Sales decreased $514 million, or
approximately 16%, in the three-month period ended March 31, 1998 as compared to
the same period in 1997. Total sales volumes increased by 13% from 4,731 million
gallons in the first quarter of 1997 to 5,368 million gallons in the first
quarter of 1998. The increase in volumes, offset by decreases in most product
sales prices resulted in the decrease in revenues.
Sales volumes of light fuels (gasoline, diesel/#2 fuel and jet
fuel), excluding bulk sales made for logistical reasons, increased by 1% in the
first quarter of 1998 as compared to the first quarter of 1997. Gasoline and
diesel/#2 fuel, excluding bulk sales, had sales volume increases of 6% and 8%,
respectively, in the first quarter of 1998, compared to the first quarter of
1997. Jet fuel, excluding bulk sales, had a sales volume decrease of 28% in the
first quarter of 1998 compared to the first quarter of 1997. Gasoline sales
volumes increased due to successful marketing efforts, including the net
addition of 379 independently owned CITGO branded outlets since March 31, 1997.
Sales prices of gasoline, excluding bulk sales, have decreased
for the three-month period ended March 31, 1998 as compared to the same period
in 1997. The average decrease for the first quarter of 1997 over the first
quarter of 1997 is 19 cents per gallon, or a 26% decrease. Sales prices of jet
fuel and diesel/#2 fuel, excluding bulk sales, decreased 18 cents, or 27% in the
first quarter of 1998 as compared to the same period in 1997.
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 $19 million, or 3%, from $684 million in
the three-month period ended March 31, 1997 to $703 million in the same period
in 1998. The increase in revenue for the quarter ended March 31, 1998 is a
result of a
15
44% increase in volumes and a 28% decrease in bulk sales prices between the
quarters. Bulk sales revenue of gasoline increased by $96 million, or 30% for
the first quarter ended March 31, 1998 as compared to the same period in 1997.
The increase in gasoline bulk sales is the result of an 81% increase in volumes
offset by a 29% decrease in price between the quarters. Bulk sales revenue of
diesel/#2 fuel decreased by $75 million, or 23%, for the first quarter ended
March 31, 1998 as compared to the same period in 1997. The decrease in diesel #2
fuel bulk sales revenue is the result of a 29% decrease in sales prices offset
by an 8% increase in volumes between the quarters.
Petrochemicals and industrial products sales revenues
decreased 3% and increased 40%, respectively, for the three months ended March
31, 1998 as compared to the three months ended March 31, 1997. The
petrochemicals revenue decrease for the quarter was the result of a 26%
decrease in unit sales price, offset by a 31% increase in sales volume, as
compared to the same period in 1997. The petrochemical sales volumes increased
primarily because of increased production of cumene and refinery grade
propylene. The industrial products revenue increase was the result of a 57%
increase in sales volume and an 11% decrease in unit sales prices for the first
quarter of 1998 as compared to the same period in 1997. The increase in
industrial products sales volumes was due to the purchase of product for sale
from the PDVMR refinery.
Equity in earnings (losses) of affiliates - net. Equity in
earnings of affiliates increased by $15 million overall for the three-month
period ended March 31, 1998, as compared to the same period in 1997. The
increase was due primarily to the change in equity in earnings of LYONDELL-CITGO
Refining Company Ltd. ("LYONDELL-CITGO"), which increased $18.2 million, from
$1.1 million in the first quarter of 1997 to $19.3 million in the first quarter
of 1998, largely as a result of the change in CITGO's interest in LYONDELL-CITGO
from approximately 13% at March 31, 1997 to approximately 42% on April 1, 1997
and to the improvement in LYONDELL-CITGO's operations since completion of its
refinery enhancement project during the first quarter of 1997. This increase in
equity in earnings has been offset by the fact that for the first three months
of 1997, the Company reflected approximately $5 million of equity in the
earnings of UNO-VEN (see Note 1 above) and for the first three months of 1998,
the Company has recorded $2.2 million in equity in earnings of Needle-Coker.
Other income (expense). Other income (expense) was $646
thousand for the three-month period ended March 31, 1998 as compared to $716
thousand for the same period in 1997. The decrease includes a $2.7 million gain
on the sale of Petro-Chemical Transport in the first quarter of 1998, which was
more than offset by other net expenses.
Cost of sales and operating expenses. Cost of sales and
operating expenses decreased by $642 million or 20%, in the quarter ended March
31, 1998, as compared to the same period in 1997. Lower crude oil costs (a
decrease from $713 million in the first quarter of 1997 to $659 million in the
first quarter of 1998) resulted from a decrease in crude prices, offset by an
increase in crude oil run volumes. Refined product purchases decreased in 1998
as compared to the comparable period in 1997 (down 39%, from $1,942 million to
$1,187 million for the first quarter). The decrease resulted from a decrease in
prices (down 28% for the first quarter of 1998 as compared to the same period in
1997), offset by an increase in refined product purchase volumes (up 4% for the
first quarter of 1998 as compared to the same period in 1997). Intermediate
feedstock purchases decreased to $264 million in the first quarter 1998 from
$285
16
million in the first quarter of 1997. Intermediate feedstock prices decreased
30%, and volumes purchased increased 22% between the quarters ended March 31,
1997 and March 31, 1998. Refining and manufacturing costs increased 21% in the
first quarter of 1998 as compared to the first quarter of 1997 (from $194
million to $234 million), due primarily to the inclusion of the Lemont refinery
in the first three months of 1998 (and which was not consolidated until May 1,
1997). Depreciation and amortization expense increased by $5 million, from $49
million to $61 million for the quarters ended March 31, 1997 and 1998,
respectively.
The Companies purchase refined products to supplement the
production from their refineries to meet marketing demands and resolve
logistical issues. Refined product purchases represented 57% and 61% of total
cost of sales and operating expenses for the first quarters of 1998 and 1997,
respectively. The Companies estimate that margins on purchased products, on
average, are somewhat lower than margins on produced products due to the fact
that the Companies can only receive the marketing portion of the total margin
received on the produced refined products. However, purchased products are not
segregated from the Companies' produced products and margins may vary due to
market conditions and other factors beyond the Companies' control. As such,
it is difficult to measure the effects on profitability of changes in volumes of
purchased products. The Companies anticipate that their purchased refined
product volume requirements will continue to increase to meet marketing demands.
In the near term, other than normal refinery turnaround maintenance, the
Companies do 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 Companies which would impact the volume of
refined products purchased and profit margins.
Gross margin. The gross margin (sales revenue less cost of
sales and operating expenses) for the three-month period ended March 31, 1998
was $213 million, or 7.8%, compared to $85 million, or 2.6%, for the same period
in 1997. The gross margin percentage in 1998 has been affected by a general
decline in the cost of goods sold, especially reductions in the cost of crude
oil, relative to the selling price of refined products as well as the positive
effect of PDVMR's operations.
Selling, general and administrative expenses. Selling, general
and administrative expenses increased in the first quarter of 1998 by 30%, from
$42 million in the first quarter of 1997 to $60 million in the first quarter of
1998. The increase is due primarily to salary and related burden allocations and
advertising expense, as well as $3 million of PDVMR's expenses due to the
consolidation of its operations.
Interest expense. Interest expense decreased by approximately
$4 million, or 7% (from $51 million to $47 million), for the first quarter ended
March 31, 1998, as compared to the same period in 1997.
Income taxes. Income taxes reported were based on an effective
tax rate of 38% for the three month period ended March 31, 1998 and 37% for the
comparable period in 1997. The increase is due primarily to a decrease in the
effective tax rate impact of the dividend exclusion deduction offset in part by
a decrease in state income taxes.
17
Liquidity and Capital Resources
For the three-month period ended March 31, 1998, the Company's
consolidated net cash provided by operating activities totaled approximately
$222 million. Net income of $95 million and depreciation and amortization of $61
million were augmented by net changes in other items of $66 million. The more
significant changes in other items included decreases in accounts receivable,
inventory, and accounts payable and other liabilities. The decline in accounts
receivable is primarily a result of a general decline in refined product selling
prices during the period. The decrease in inventory is primarily due to
management's initiatives during the first quarter to reduce inventory levels.
The decrease in accounts payable is primarily due to a decrease in the volume of
domestic crude oil purchased and a decrease in price.
Net cash used in investing activities totaled $44 million for
the three-month period ended March 31, 1998 consisting primarily of capital
expenditures of $56 million (compared to $61 million for the same period in
1997) and additional investments in and loans to LYONDELL-CITGO of $7 million
(compared to $45 million for the same period in 1997) offset by a decrease in
restricted cash of $6 million and proceeds on sale of Petro-Chemical Transport
of $7 million.
Net cash used in financing activities of $175 million for the
three-month period ended March 31, 1998 consisting primarily of dividends paid
to parent of $110 million, $133 million net repayment on revolving bank loans
and $7 million net repayment on a term loan, partially offset by proceeds from
short-term bank loans of $77 million.
As of March 31, 1998, capital resources available to the
Company include cash generated by operations, available borrowing capacity under
CITGO's committed bank facilities of $640 million and $135 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 debt securities may be offered and
sold from time to time. The Companies' management 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
recently anticipated future obligations as they arise. The Companies
periodically evaluate other sources of capital in the marketplace and anticipate
that long-term capital requirements will be satisfied with current capital
resources and future financing arrangements, including the issuance of debt
securities. The Company's ability to obtain such financing will depend on
numerous factors, including market conditions and the perceived creditworthiness
of the Company at that time.
The Companies believe that they are in material compliance
with their obligations under their debt financing arrangements at March 31,
1998.
Derivative Commodity and Financial Instruments
The Companies enter into petroleum futures contracts primarily
to reduce their inventory exposure to market risk. The Companies also buy and
sell 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
18
to market price movements of crude oil and refined products. Resulting gains and
losses on such contracts, therefore, will generally be offset by gains and
losses on the Companies' hedged inventory or future purchases and sales.
Non-hedging activity in the first quarter of 1998 resulted in an immaterial gain
that was recorded in the current period.
The Companies have only limited involvement with other
derivative financial instruments and generally does not use them for trading
purposes. Generally, they are used to manage well defined interest rate and
commodity price risks arising out of the Companies' core activities. The
Companies 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 March 31, 1998, based on the
estimated amount that the Companies would receive or pay to terminate the
agreements as of that date and taking into account current interest rates, was
an unrealized loss of $3.0 million. In connection with the determination of said
fair market value, the Companies consider the creditworthiness of
counterparties, but no adjustment was determined to be necessary as a result.
The impact of these instruments on cost of sales and operating
expenses and pretax earnings was immaterial for all periods presented.
Management considers the market risk to the Companies related to these
instruments to be insignificant during the periods presented.
Recent Developments
On April 8, 1998, PDVSA Petroleo y Gas, S.A. notified CITGO and other
companies to whom it supplies crude oil of reductions in crude production as
well as a declaration of force majeure on its long-term crude supply contracts
pursuant to orders from the government of the Republic of Venezuela. The impacts
on CITGO include (i) a 25,000 barrel per day reduction in crude supply to its
asphalt refineries; (ii) an increase in the specific gravity of the crude oil
supplied to its other refineries which precludes optimal use of the Company's
refining facilities; and (iii) an increase in the specific gravity of the crude
oil supplied to LYONDELL-CITGO which precludes optimal use of its refining
facilities. With respect to its asphalt operations, CITGO is attempting to
secure alternate asphalt supplies. With respect to its light fuels refineries,
CITGO is attempting to minimize the effect of the change in specific gravity by
seeking alternate supplies and by adjusting its operations. It is not possible
to determine the effect of this development on CITGO's operations because of the
uncertainties concerning CITGO's ability to mitigate the impact of the actions
described above and the duration of this situation.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There is a class action lawsuit pending against CITGO and
other operators and owners of nearby 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. The certification of this case as a class
action in 1995 was appealed by CITGO and other parties. 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
19
Corpus Christi refinery and the respective industrial facilities of the other
defendants. Two related personal injury and wrongful death lawsuits were filed
in 1996 and are in preliminary stages of discovery at this time. In 1997, CITGO
signed an agreement to settle the property damage class action lawsuit for
approximately $17.3 million which included the purchase of approximately 290
properties in an adjacent neighborhood. Of this amount, $15.7 million was
expensed in 1997.
CITGO submitted a settlement proposal to the court. The court
appointed a guardian to review the proposed settlement terms. Subsequently, the
Texas Supreme Court decided to hear CITGO's appeal of the trial court's class
certification order. This decision raised questions whether the trial court had
authority to proceed with the settlement. Additionally, the trial court sought
to impose additional conditions upon the settlement which were unacceptable to
CITGO. For these reasons, CITGO opposed the approval and enforcement of the
settlement agreement as proposed to be revised and enforcement has now been
stayed pending a ruling by the Texas Supreme Court. If the settlement agreement
is enforced, CITGO could be liable for the full settlement amount of $17.3
million less amounts related to properties acquired pursuant to a previously
announced independent purchase program. CITGO has entered into agreements to
acquire approximately 88% of the properties which were the subject of the
purchase provisions of the settlement agreement and to settle the related
property damage claims. Closings of these transactions are expected to occur
within the next twelve months.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
27 Financial Data Schedule (filed electronically only)
(b) Reports on Form 8-K
None.
20
SIGNATURES
Pursuant to the requirements of the Securities 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 15, 1998 /s/ ALONSO VELASCO
------------------------------
Alonso Velasco
President, Chief Executive and
Financial Officer
Date: May 15, 1998 /s/ JOSE M. PORTAS
------------------------------
Jose M. Portas
Secretary