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, 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 July 31, 1998)
Page 1 of 23
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, 1998
Table of Contents
Page
FACTORS AFFECTING FORWARD LOOKING STATEMENTS................................ 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets --
June 30, 1998 and December 31, 1997....................... 4
Condensed Consolidated Statements of Income --
Three Month Periods Ended June 30, 1998 and 1997
Six Month Periods Ended June 30, 1998 and 1997............ 5
Condensed Consolidated Statements of Cash Flows --
Six Month Periods Ended June 30, 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......................................... 22
Item 6. Exhibits and Reports on Form 8-K.......................... 22
SIGNATURES.................................................................. 23
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,
1998 1997
--------------- --------------
(Unaudited)
ASSETS:
CURRENT ASSETS
Cash and cash equivalents $ 41,143 $ 35,268
Accounts receivable, net 630,029 666,264
Due from affiliates 53,477 55,883
Inventories 1,014,599 1,000,498
Current portion of notes receivable from PDVSA 250,000 250,000
Prepaid expenses and other 31,558 20,872
---------- ----------
TOTAL CURRENT ASSETS 2,020,806 2,028,785
NOTES RECEIVABLE FROM PDVSA 750,000 750,000
PROPERTY, PLANT AND EQUIPMENT - NET 3,423,788 3,427,983
RESTRICTED CASH 994 6,920
INVESTMENTS IN AFFILIATES 836,797 841,323
OTHER ASSETS 230,369 188,511
----------- -----------
TOTAL ASSETS $ 7,262,754 $ 7,243,522
=========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY:
CURRENT LIABILITIES
Short-term bank loans $ 25,000 $ 3,000
Accounts payable 497,744 491,977
Due to affiliates 144,828 231,152
Taxes other than income 234,150 180,143
Dividends payable 79,500 -
Other current liabilities 243,188 275,086
Current portion of long-term debt 345,220 345,099
Current portion of capital lease obligation 13,879 13,140
---------- ----------
TOTAL CURRENT LIABILITIES 1,583,509 1,539,597
LONG-TERM DEBT 2,009,637 2,047,708
CAPITAL LEASE OBLIGATION 109,456 116,586
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS 202,332 199,765
OTHER NONCURRENT LIABILITIES 252,080 234,710
DEFERRED INCOME TAXES 546,494 487,727
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 28,696 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 1,048,114 1,106,656
------------- -------------
TOTAL SHAREHOLDER'S EQUITY 2,530,550 2,589,092
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 7,262,754 $ 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 PERIODS SIX MONTH PERIODS
ENDED ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1998 1997 1998 1997
---------- ---------- ---------- ----------
REVENUES:
Net sales $ 2,913,007 $ 3,380,253 $ 5,610,829 $6,585,600
Sales to affiliates 31,280 60,139 82,404 117,518
---------- ---------- ---------- ----------
2,944,287 3,440,392 5,693,233 6,703,118
Equity in earnings (losses) of affiliates, net 14,341 8,343 41,458 20,134
Interest income from PDVSA 15,693 19,586 35,124 39,017
Other income (expense), net 976 907 1,622 1,623
------- ------- --------- ---------
2,975,297 3,469,228 5,771,437 6,763,892
--------- --------- --------- ---------
COST OF SALES AND EXPENSES:
Cost of sales and operating expenses 2,752,531 3,255,776 5,288,720 6,433,535
(including purchases of $914,889,
$952,624, $1,756,010 and $1,924,829 from
affiliates)
Selling, general and administrative expenses 61,692 54,369 121,974 96,718
Interest expense:
Capital leases 3,648 3,980 7,297 7,960
Other 43,440 50,935 86,814 97,471
Minority interest in earnings of
consolidated subsidiary 402 495 360 732
------- ------- ------- -------
2,861,713 3,365,555 5,505,165 6,636,416
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 113,584 103,673 266,272 127,476
INCOME TAXES 42,964 25,680 100,314 34,435
---------- ---------- --------- ----------
NET INCOME $ 70,620 $ 77,993 $ 165,958 $ 93,041
========== ========== =========== ==========
(See Notes to the Condensed Consolidated Financial Statements.)
5
PDV AMERICA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Thousands)
SIX MONTH PERIODS
ENDED
JUNE 30, 1998 JUNE 30, 1997
---------------------- ------------------
CASH FLOWS PROVIDED BY (USED BY) OPERATING
ACTIVITIES $ 263,592 $ (140,075)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (114,985) (124,342)
Decrease in restricted cash 5,926 2,665
Investments in LYONDELL-CITGO Refining Company Ltd. - (45,635)
Loans to LYONDELL-CITGO Refining Company Ltd. (7,000) -
Investments in and advances to affiliates (2,555) (717)
Proceeds from sale of investment 7,160 -
Other 13,949 11,980
---------- ----------
Net cash used in investing activities (97,505) (156,049)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments) borrowings of revolving bank loans (37,561) 175,000
Net proceeds from short-term bank loans 22,000 22,000
Proceeds from issuance of tax-exempt bonds 25,000 -
Payments on term bank loans (14,705) (14,706)
Dividend to parent (145,000) -
Payments on senior notes of UNO-VEN - (135,000)
Repayments of other debt (3,556) (3,571)
Capital contribution from parent - 250,000
Payments of capital lease obligations (6,390) (5,574)
---------- ----------
Net cash (used in) provided by financing activities (160,212) 288,149
----------- ----------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 5,875 (7,975)
CASH AND CASH EQUIVALENTS, BEGINNING OF
PERIOD 35,268 32,845
---------- ----------
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 41,143 $ 24,870
=========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest (net of amount capitalized) $ 91,524 $ 103,927
==========- ===========
Income taxes, net of refunds received $ 43,392 $ 26,275
=========-= -==========
(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, 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
and six month periods ended June 30, 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 and six month periods
ended June 30, 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 the related Partnership Interest Retirement
Agreement), and such assets are now operated by CITGO under an operating
agreement between PDVMR and CITGO. Accordingly, the 1997 consolidated financial
statements reflect the equity in earnings of UNO-VEN for the period from January
1, 1997 to April 30, 1997 and the results of operations and cash flows of PDVMR
on a consolidated basis for the period from May 1, 1997 through June 30, 1997.
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 and six month periods
ended June 30, 1998 and 1997.
7
Certain reclassifications have been made to the June 30, 1997 financial
statements to conform with the classifications used at June 30, 1998.
2. Inventories
Inventories at June 30, 1998 have been written down to estimated net
realizable value, and results of operations for the periods ending June 30, 1998
include a corresponding charge of $10.2 million. Inventories, primarily at LIFO,
consist of the following:
June 30, December 31,
1998 1997
----------- ------------
(Unaudited)
(000's Omitted)
Refined products............. $ 721,435 $ 734,261
Crude oil.................... 226,232 196,349
Materials and supplies....... 66,932 69,888
---------- ----------
$1,014,599 $1,000,498
========== ==========
8
3. Long-term Debt
June 30, December 31,
1998 1997
----------- ------------
(Unaudited)
(000's Omitted)
Senior Notes:
7.25% Senior Notes $250 million face amount due 1998 $ 249,973 $ 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 497,527 497,330
Revolving Bank Loans:
Bank of America 120,000 135,000
Chase 92,000 122,000
Term Bank Loan 44,118 58,823
Shelf Registration:
7.875% Senior Notes $200 million face amount, due 2006 199,760 199,745
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
Gulf Coast solid waste facility revenue bonds due 2028 25,000 -
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 25,000 28,571
----------- -----------
2,354,857 2,392,807
Less Current Portion of Long-term Debt (345,220) (345,099)
----------- -----------
$ 2,009,637 $ 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
On May 13, 1998, CITGO terminated its $675 million revolving bank loan and
replaced it with (i) a $400 million, five year, revolving bank loan and (ii) a
$150 million, 364 day, revolving bank loan.
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.
Litigation is pending in the U.S. District Court for the Western District
of Louisiana 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. The U.S.
Fifth Circuit Court of Appeals has upheld the trial court's denial of class
certification; the plaintiffs are seeking rehearing of this ruling.
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
10
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 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. On June 18, 1998, the trial court granted the
motions for summary judgment filed by CITGO and the other defendants; the union
has appealed this ruling.
There is a class action lawsuit pending in Corpus Christi, Texas state
court against CITGO and other operators and owners of nearby industrial
facilities filed in 1993 for damages to residential properties located in the
vicinity of the industrial facilities. The suit claims that the value of
properties has been reduced, as a result of air, soil and groundwater
contamination occasioned by operations of the industrial facilities owned by
CITGO and other defendants. Two related personal injury and wrongful death
lawsuits were also filed in 1996 and are in preliminary stages of discovery at
this time. CITGO and other defendants appealed the trial court's certification
of the class action to the Texas Supreme Court.
In 1997, CITGO signed an agreement to settle the property damage class
action claims for approximately $17.3 million, the substantial portion of which
related to the purchase of approximately 290 properties in one of the adjacent
neighborhoods. Of this amount, $15.7 million was expensed in 1997. The Court
appointed a guardian to review the proposed settlement terms. The Texas Supreme
Court subsequently decided to consider CITGO's appeal of the class
certification; that action raised questions whether the trial court had
authority to proceed with the settlement. Additionally, the trial court sought
to impose additional settlement conditions that were unacceptable to CITGO. For
these reasons, CITGO opposed approval and enforcement of the settlement
agreement as it was revised and pursued its appeal of the class certification to
the Texas Supreme Court.
The Texas Supreme Court ruled in July 1998 that it declined to hear the
appeal of the class certification. CITGO will seek reconsideration of this
ruling but it is not likely that the Supreme Court will reverse itself. The case
will likely be remanded to the district court for trial; however, if the
settlement agreement is enforced by the trial court, CITGO could be liable for
the balance of the settlement amount after deductions for amounts it has paid
related to its purchase of properties. CITGO has agreed to purchase 245 of the
properties it sought to acquire and will receive settlements of property damage
claims in connection with such purchases. CITGO has offers open to purchase the
remaining properties.
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
11
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 June 30, 1998, the Companies had $57.5 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 that period; there was no such
activity in the quarter ended June 30, 1998.
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 June 30, 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 $3.4 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.
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
12
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 future operations because of
the uncertainties concerning CITGO's ability to continue to mitigate the impact
of the actions described above and the duration of this situation.
6. Changes in Shareholder's Equity
The Company declared dividends to be paid to its parent company, PDV
Holding, totaling $224.5 million in the first six months of 1998. The balance of
dividends payable of $79.5 million at June 30, 1998 was paid in July, 1998.
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 second quarter ended June 30, 1998, the Company generated net income
of $70.7 million on revenue of $3.0 billion compared to net income of $78.0
million on revenues of $3.5 billion for the same period last year. In the six
month period ended June 30, 1998, the Company generated net income of $166.0
million on revenue of $5.8 billion compared to net income of $93.0 million on
revenues of $6.8 billion for the same period last year. The improvement in the
six months ended June 30, 1998 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, which occurred primarily in the three months
ended March 31, 1998, as well as the inclusion of PDVMR's results of operations.
In both the three and six month periods ended June 30, 1998, the comparison is
also affected by a favorable resolution of a significant tax issue with the
Internal Revenue Service ("IRS") which reduced the income tax expense that CITGO
recorded in the quarter ended June 30, 1997.
CITGO's revenue accounted for over 99% of PDV America's consolidated
revenues in the first six months of 1998 and 1997. PDVMR's sales of $200 million
for the three month period ended June 30, 1998 and $477 million for the six
month period ended June 30, 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 $48 million to the Companies' consolidated gross margin and $45
million to PDV America's consolidated income before interest and taxes for the
six months ended June 30, 1998.
14
Results of Operations
The following table summarizes the sources of PDV America's sales revenues
and sales volumes for the three and six month periods ended June 30, 1998 and
1997:
Three Months Six Months Three Months Six Months
Ended June 30, Ended June 30, Ended June 30, Ended June 30,
-------------- -------------- -------------- --------------
1998 1997 1998 1997 1998 1997 1998 1997
---- ---- ---- ---- ---- ---- ---- ----
($ in millions) (MM gallons)
Gasoline $1,736 $1,952 $3,316 $3,773 3,361 2,998 6,520 5,635
Jet fuel 210 286 414 647 456 504 884 1,055
Diesel/#2 fuel 500 600 1,024 1,274 1,212 1,087 2,370 2,156
Petrochemicals, industrial
products and other products 217 304 472 533 561 499 1,077 856
Asphalt 87 122 110 157 228 216 280 279
Lubricants and waxes 117 120 225 224 60 62 115 116
------ ------ ------ ------ ------ ------ ------ ------
Total refined products
sales $2,867 $3,384 $5,561 $6,608 5,878 5,366 11,246 10,097
Other sales 77 56 132 95
------ ------ ------ ------
Total sales $2,944 $3,440 $5,693 $6,703 5,878 5,366 11,246 10,097
====== ====== ====== ====== ====== ====== ====== ======
The following table summarizes PDV America's cost of sales and operating
expenses for the three and six month periods ended June 30, 1998 and 1997:
PDV America's Cost of Sales and Operating Expenses
Three Months Six Months
Ended June 30, Ended June 30,
------------------------------------ -----------------------------
1998 1997 1998 1997
----------------- ----------------- ----------------- ----------
($ in millions) ($ in millions)
Crude oil $ 648 $ 924 $ 1,307 $ 1,637
Refined products 1,525 1,745 2,712 3,687
Intermediate feedstocks 233 262 497 547
Refining and manufacturing costs 243 236 477 430
Other operating costs and expenses 104 89 296 133
and inventory changes ------ ------ ------- ------
Total cost of sales and operating $2,753 $3,256 $ 5,289 $ 6,434
expenses
Sales revenues and volumes. Sales decreased $496 million, or approximately
14%, in the three month period ended June 30, 1998 and by $1,010 million, or
15%, in the six month period ended June 30, 1998 as compared to the same periods
in 1997. Total sales volumes increased by 10% from 5,366 million gallons in the
second quarter of 1997 to 5,878 million gallons in the second quarter of 1998,
and increased by 11% from 10,097 million gallons in the first six months of 1997
to 11,246 million gallons in the first six months of 1998. The decreases
15
in most product sales prices, partially offset by the increase in volumes,
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 decreased by 7% in the second
quarter of 1998 as compared to the second quarter of 1997, and decreased by 4%
in the first six months of 1998 as compared to the same period in 1997.
Gasoline, diesel/#2 fuel and jet fuel, excluding bulk sales, had sales volume
decreases of 3%, 12% and 22%, respectively, in the second quarter of 1998,
compared to the second quarter of 1997. Gasoline, excluding bulk sales, had a
sales volume increase of 1% in the first six months of 1998 compared to the
first six months of 1997. For the six month period ended June 30, 1998 versus
the same period in 1997, diesel/#2 fuel and jet fuel, excluding bulk sales, had
sales volume decreases of 3% and 25%, respectively.
Sales prices of gasoline, excluding bulk sales, have decreased for the
three month period ended June 30, 1998 as compared to the same period in 1997.
The average decrease for the second quarter of 1998 over the second quarter of
1997 is 13 cents per gallon, or a 19% decrease. Sales prices of jet fuel and
diesel/#2 fuel, excluding bulk sales, both decreased 13 cents, or 22% and 23%,
respectively, in the second quarter of 1998 as compared to the same period in
1997. For the six month period ended June 30, 1998, gasoline prices, excluding
bulk sales, decreased approximately 23% and jet fuel and diesel/#2 fuel prices
both decreased approximately 25% from prices for 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 in bulk gasoline,
diesel/#2 fuel and jet fuel from and to other refiners and in the spot market.
An affiliate of PDVSA entered into an agreement to acquire a 50% equity interest
in a refinery in Chalmette, Louisiana in October 1997 and has assigned to CITGO
its option to purchase up to 50% of the refined products produced at the
refinery through December 31, 1998. Placing this new supply into the
distribution network has resulted in a sharp increase in the volume of bulk
purchases and sales. In addition, a management decision to reduce inventory
levels has also contributed to the increase in the volume of such transactions.
Such sales increased by $190 million, or 33%, from $580 million in the three
month period ended June 30, 1997 to $770 million in the same period in 1998. The
increase in revenue for the quarter ended June 30, 1998 is a result of a 70%
increase in volumes offset by a 22% decrease in sales prices between the
quarters. Sales revenue of gasoline alone increased by $143 million, or 44% for
the second quarter ended June 30, 1998 as compared to the same period in 1997.
The increase in gasoline sales is the result of an 83% increase in volumes
offset by a 21% decrease in sales prices between the quarters. Such sales
revenue increased by $208 million, or 16%, from $1,264 million in the six month
period ended June 30, 1997 to $1,472 million in the same period in 1998. The
increase in revenue for the six month period ended June 30, 1998 is a result of
a 56% increase in volumes offset by a 25% decrease in sales prices between the
periods. Sales revenue of gasoline alone increased by $238 million, or 37% for
the six month period ended June 30, 1998 as compared to the same period in 1997.
The increase in sales
16
revenue is the result of a 82% increase in volumes offset by a 25% decrease in
sales prices between the periods.
Petrochemicals and industrial products sales revenues decreased 32% and 3%,
respectively, for the three months ended June 30, 1998 as compared to the three
months ended June 30, 1997, and decreased 19% and increased 14%, respectively,
for the six months ended June 30, 1998 versus the six months ended June 30,
1997. The petrochemicals revenue decreases were the result of a 29% decrease in
unit sales price, and a 5% decrease in sales volume for the second quarter of
1998 and a 27% decrease in unit sales price, and an 11% increase in volume for
the six month period ended June 30, 1998, as compared to the same periods in
1997. The industrial products revenue decrease for the quarter was the result of
a 14% decrease in unit sales prices and a 13% increase in sales volume for the
second quarter of 1998 as compared to the same period in 1997, and the increase
for the six month period was the result of a 31% increase in sales volume and a
13% decrease in unit sales price for the six month period ended June 30, 1998,
as compared to the same period in 1997.
Asphalt sales revenues decreased $35 million and sales volumes increased 5%
in the second quarter of 1998, and sales revenue increased $47 million and sales
volume increased less than 1% in the first six months of 1998, as compared to
the same periods in 1997. Asphalt sales prices decreased 33% in the second
quarter of 1998, and 31% in the first six months of 1998, as compared to the
same periods in 1997.
Equity in earnings (losses) of affiliates - net. Equity in earnings of
affiliates increased by $6.0 million for the three month period and increased
$21 million for the six month period ended June 30, 1998, as compared to the
same periods in 1997. The increase was primarily due to the change in the equity
in the earnings of LYONDELL-CITGO Refining Company Ltd. ("LYONDELL-CITGO"),
which increased $18 million, from $10 million in the first six months of 1997 to
$28 million in the first six months of 1998. This increase is due primarily to
the change in CITGO's interest in LYONDELL-CITGO which increased from
approximately 13% at March 31, 1997 to approximately 42% on April 1, 1997 and
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 also been increased by approximately $0.5 million of equity in the
earnings of UNO-VEN (see Note 1 above) for the first six months of 1997, and
$3.8 million in equity in earnings of Needle-Coker for the first six months of
1998. The increase for the three month period ended June 30, 1998 as compared to
the same period in 1997 is primarily due to equity in the earnings of
Needle-Coker of $1.6 million as compared to a loss from equity in the earnings
of UNO-VEN of $4 million in 1997.
Cost of sales and operating expenses. Cost of sales and operating expenses
decreased by $503 million or 15%, in the quarter ended June 30, 1998, and
decreased $1,145 million or 18%, in the six month period ended June 30, 1998, as
compared to the same periods in 1997. Lower crude oil costs (a decrease from
$924 million in the second quarter of 1997 to $648 million in the second quarter
of 1998) resulted from a decrease in crude prices, and a
17
decrease in crude oil volumes purchased. Crude oil costs decreased from $1,637
million in the six month period ended June 30, 1997 to $1,307 million in the
first six months of 1998, the result of a decrease in crude prices offset by an
increase in crude oil volumes purchased. Refined product purchases decreased in
the second quarter of 1998 as compared to the same quarter in 1997 from $1,745
million to $1,525 million and decreased in the first six months of 1998 as
compared to the same period in 1997 from $3,687 million to $2,712 million. The
changes resulted from decreases in prices partially offset by increases in
refined product purchase volumes. Intermediate feedstock purchases decreased to
$233 million in the second quarter of 1998 from $262 million in the second
quarter of 1997, and decreased to $497 million for the first six months of 1998
from $547 million for the first six months of 1997. Refining and manufacturing
costs increased in the second quarter from $236 million to $243 million and in
the six month period ended June 30 from $430 million to $477 million, due
primarily to the inclusion of the Lemont refinery in the first six months of
1998 which was not consolidated until May 1, 1997. Depreciation and amortization
expense increased by $9 million, from $56 million to $65 million between the
quarters ended June 30, 1997 and 1998, respectively, and $24 million, from $105
million to $129 million between the six month periods ended June 30, 1997 and
1998, respectively. Inventories at June 30, 1998 have been written down to
estimated net realizable value, and cost of sales and operating expenses for the
periods ending June 30, 1998 include a corresponding charge of $10.2 million.
The Companies purchase refined products to supplement the production from
their refineries to meet marketing demands and resolve logistical issues.
Refined product purchases represented 55% and 54% of total cost of sales and
operating expenses for the second quarters of 1998 and 1997, respectively, and
51% and 57% for the first six months 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 wholesale 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.
CITGO is a party to a contract with an affiliate of Occidental Petroleum
Corporation for the purchase of light, sweet crude oil to produce lubricants.
This contract expires on August 31, 1998. In 1997, purchases under this contract
averaged 47 thousand barrels per day. CITGO has entered into a contract with
PDVSA for the purchase of 400 thousand to 800 thousand barrels per month of
sweet crude. Spot purchases will supplement this volume.
18
Gross margin. The gross margin for the three month period ended June 30,
1998 was $191 million, or 6.5%, compared to $184 million, or 5.3% for the same
period in 1997. The gross margin for the six month period ended June 30, 1998
was $404 million or 7.0% compared to $269 million or 4.0% for the six month
period ended June 30, 1997. In the quarter ended June 30, 1998, both the revenue
per gallon and cost per gallon components of gross margin declined by
approximately 22%. In the six month period ended June 30, 1998, the revenue per
gallon component declined by approximately 24% while the cost per gallon
component declined by approximately 26%. The reduction in the cost of crude oil
relative to the selling price of refined product is the primary reason for the
change in gross margins per gallon for the three and six month periods ended
June 30, 1998 compared to the same periods in 1997.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased in the second quarter of 1998 by 13%, from $54
million in the second quarter of 1997 to $62 million in the second quarter of
1998, and increased 26% from $97 million in the first six months of 1997 to $122
million in the same period in 1998. These increases are due primarily to salary
and related burden allocations and increases in advertising expense, as well as
the inclusion of PDVMR expenses in the consolidated statement of income of PDV
America since May 1, 1997 (which were $2 million for the period ended June 30,
1997 and $3 million and $5 million for the three and six month periods ended
June 30, 1998).
Interest expense. Interest expense decreased by approximately $8 million,
or 14% (from $55 million to $47 million), for the second quarter ended June 30,
1998, and decreased year-to-date by approximately $11 million, or 11% (from $105
million to $94 million), as compared to the same periods in 1997. The primary
reason for the reduction in interest expense is the sharp reduction in the use
of CITGO's revolving bank loan in the periods ended June 30, 1998 compared to
the same periods ended June 30, 1997.
Income taxes. Income taxes reported were based on an effective tax rate of
38% for the six month period ended June 30, 1998 and 27% for the comparable
period in 1997. The prior year effective tax rate was unusually low due to a
favorable resolution of a significant tax issue in the last IRS audit. In
addition, the effective tax rate increased slightly due to a decrease in the
effective tax rate impact of the dividend exclusion deduction, offset in part by
a decrease in state income taxes.
Liquidity and Capital Resources
For the six month period ended June 30, 1998, the Company's consolidated
net cash provided by operating activities totaled approximately $264 million.
Net income of $166 million and depreciation and amortization of $132 million
were reduced by net changes in other items of $31 million. The more significant
changes in other items included a decrease in accounts receivable (including
amounts due from affiliates) of $110 million and an increase in deferred taxes
of $58 million, which were partially offset by decreases in accounts payable
(including
19
amounts due to affiliates) of $4 million, increases in other assets of $62
million, and decreases in other liabilities of $126 million.
Net cash used in investing activities totaled $98 million for the six month
period ended June 30, 1998 consisting primarily of capital expenditures of $115
million (compared to $124 million for the same period in 1997) and additional
investments in and loans to LYONDELL-CITGO of $7 million (compared to $46
million for the same period in 1997) partially offset by proceeds from other
items, primarily the sale of property, plant and equipment of $14 million, a
decrease in restricted cash of $6 million and proceeds on sale of a subsidiary,
Petro-Chemical Transport, of $7 million.
Net cash used in financing activities totaled $160 million for the six
month period ended June 30, 1998 consisting primarily of dividends paid to the
parent company of $145 million, $38 million net repayment on revolving bank
loans and $15 million payment on term bank loans, partially offset by proceeds
from short-term bank loans of $22 million and $25 million in proceeds from
issuance of tax-exempt revenue bonds.
As of June 30, 1998, capital resources available to the Company include
cash generated by operations, available borrowing capacity under CITGO's
committed bank facilities of $430 million, $130 million of uncommitted
short-term borrowing facilities with various banks and $33 million under PDVMR's
committed bank facilities. 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 compliance with their obligations
under their debt financing arrangements at June 30, 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
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
20
inventory or future purchases and sales. Non-hedging activity in the first
quarter of 1998 resulted in an immaterial gain that was recorded in that period;
there was no such activity in the quarter ended June 30, 1998.
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 June 30, 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 $3.4
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.
New Accounting Standard
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 133, "Accounting for Derivative Instruments and
Hedging Activities" ("SFAS No. 133"). The Statement establishes accounting and
reporting standards for derivative instruments and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure these instruments
at fair value. The Companies have not determined the impact on the financial
statements that may result from the adoption of SFAS No. 133, which is required
no later than January 1, 2000.
21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
For a description of certain recent developments, see Note 4 to the
Condensed Consolidated Financial Statements (unaudited) for the Three Month and
Six Month Periods Ended June 30, 1998, 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
None.
22
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, 1998 /s/ LUIS URDANETA
---------------------
Luis Urdaneta
President, Chief Executive and
Financial Officer
Date: August 14, 1998 /s/ JOSE I. MORENO
----------------------
Jose I. Moreno
Secretary