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United States
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 0R 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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COMMISSION FILE NUMBER 1-12138
PDV AMERICA, INC.
-----------------
(Exact name of registrant as specified in its charter)
DELAWARE 51-0297556
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
ONE WARREN PLACE, 6100 SOUTH YALE AVENUE, TULSA, OKLAHOMA 74136
---------------------------------------------------------------
(Address of principal executive office) (Zip Code)
(918) 495-4000
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(Registrant's telephone number, including area code)
750 LEXINGTON AVENUE, NEW YORK, NEW YORK 10022
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable date.
COMMON STOCK, $1.00 PAR VALUE 1,000
----------------------------- -----
(Class) (outstanding at October 31, 2001)
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PDV AMERICA, INC.
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
TABLE OF CONTENTS
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<Table>
<Caption>
PAGE
FACTORS AFFECTING FORWARD LOOKING STATEMENTS...........................................................1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets - September 30, 2001 and December 31, 2000.........2
Condensed Consolidated Statements of Income and Comprehensive Income -
Three and Nine-Month Periods Ended September 30, 2001 and 2000...........................3
Condensed Consolidated Statement of Shareholder's Equity - Nine-Month Period
Ended September 30, 2001.................................................................4
Condensed Consolidated Statements of Cash Flows - Nine-Month Periods Ended
September 30, 2001 and 2000..............................................................5
Notes to the Condensed Consolidated Financial Statements.................................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations...................................................................15
Item 3. Quantitative and Qualitative Disclosures About Market Risk..............................21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.......................................................................26
Item 6. Exhibits and Reports on Form 8-K........................................................26
SIGNATURES............................................................................................27
</Table>
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,
strategic planning, purchasing patterns of refined products and capital
resources available to the Companies (as defined herein) are forward looking
statements. In addition, when used in this document, the words "anticipate,"
"estimate," "prospect" and similar expressions are used to identify 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 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.
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
PDV AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2001 2000
(UNAUDITED)
------------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 30,447 $ 20,751
Accounts receivable, net 1,226,207 1,372,712
Due from affiliates 34,419 59,519
Inventories 1,176,337 1,156,065
Prepaid expenses and other 25,178 16,439
------------- ------------
Total current assets 2,492,588 2,625,486
NOTES RECEIVABLE FROM PDVSA AND AFFILIATE 798,000 798,000
PROPERTY, PLANT AND EQUIPMENT - Net 3,240,651 3,287,277
INVESTMENTS IN AFFILIATES 707,914 712,560
OTHER ASSETS 215,287 211,855
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$ 7,454,440 $ 7,635,178
============= ============
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Short-term bank loans $ 64,000 $ 37,500
Accounts payable 779,351 1,039,756
Payables to affiliates 323,393 452,026
Taxes other than income 180,610 210,986
Other 240,463 245,864
Income taxes payable 72,556 74,152
Current portion of deferred income taxes 28,630 43,950
Current portion of long-term debt 85,071 47,078
Current portion of capital lease obligation 19,274 26,649
------------- ------------
Total current liabilities 1,793,348 2,177,961
LONG-TERM DEBT 1,579,035 1,518,639
CAPITAL LEASE OBLIGATION 57,421 67,322
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS 216,713 206,339
OTHER NONCURRENT LIABILITIES 217,892 215,030
DEFERRED INCOME TAXES 732,344 629,163
MINORITY INTEREST 32,546 31,518
COMMITMENTS AND CONTINGENCIES (Note 6)
SHAREHOLDER'S EQUITY:
Common stock - $1.00 par value, 1,000 shares authorized,
issued and outstanding 1 1
Additional capital 1,532,435 1,532,435
Retained earnings 1,296,128 1,259,135
Accumulated other comprehensive loss (3,423) (2,365)
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Total shareholder's equity 2,825,141 2,789,206
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$ 7,454,440 $ 7,635,178
============= ============
</Table>
See notes to condensed consolidated financial statements.
2
PDV AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
<Table>
<Caption>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------------ ------------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
REVENUES:
Net sales $ 5,090,755 $ 5,824,304 $ 15,676,288 $ 16,240,849
Sales to affiliates 77,357 58,415 209,346 158,699
------------ ------------ ------------ ------------
5,168,112 5,882,719 15,885,634 16,399,548
Equity in earnings of affiliates 36,722 27,692 97,543 31,257
Interest income from affiliates 16,544 18,158 49,632 60,861
Other income (expense) - net (17,358) (5,740) (15,267) (11,073)
------------ ------------ ------------ ------------
5,204,020 5,922,829 16,017,542 16,480,593
COST OF SALES AND EXPENSES:
Cost of sales and operating expenses 4,986,147 5,646,224 15,051,473 15,823,892
Selling, general and administrative expenses 67,236 58,546 189,937 161,254
Interest expense, excluding capital lease 27,123 32,718 83,966 107,848
Capital lease interest charge 2,157 2,643 6,970 8,376
Minority interest 957 463 1,028 1,855
------------ ------------ ------------ ------------
5,083,620 5,740,594 15,333,374 16,103,225
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 120,400 182,235 684,168 377,368
INCOME TAXES 44,242 60,991 248,075 132,735
------------ ------------ ------------ ------------
INCOME BEFORE CUMULATIVE EFFECT OF
CHANGE IN ACCOUNTING PRINCIPLE 76,158 121,244 436,093 244,633
CUMULATIVE EFFECT, ACCOUNTING FOR DERIVATIVES,
NET OF RELATED INCOME TAXES OF $7,977 -- -- 13,600 --
------------ ------------ ------------ ------------
NET INCOME 76,158 121,244 449,693 244,633
------------ ------------ ------------ ------------
OTHER COMPREHENSIVE INCOME (LOSS):
Cash flow hedges:
Cumulative effect, accounting for derivatives, net
of related income taxes of $(850) -- -- (1,450) --
Less: reclassification adjustment for derivative
losses included in net income, net of related
income taxes of $46 and $230 78 -- 392 --
------------ ------------ ------------ ------------
OTHER COMPREHENSIVE INCOME (LOSS) 78 -- (1,058) --
------------ ------------ ------------ ------------
COMPREHENSIVE INCOME $ 76,236 $ 121,244 $ 448,635 $ 244,633
============ ============ ============ ============
</Table>
See notes to condensed consolidated financial statements.
3
PDV AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY (UNAUDITED)
(DOLLARS AND SHARES IN THOUSANDS)
- --------------------------------------------------------------------------------
<Table>
<Caption>
ACCUMULATED
OTHER
COMMON STOCK ADDITIONAL RETAINED COMPREHENSIVE
SHARES AMOUNT CAPITAL EARNINGS LOSS TOTAL
------ ------ ----------- ---------- ------------- -----------
BALANCE, DECEMBER 31, 2000 1 $ 1 $ 1,532,435 $1,259,135 $ (2,365) $ 2,789,206
Net Income -- -- -- 449,693 -- 449,693
Other comprehensive income (loss) -- -- -- -- (1,058) (1,058)
Dividends paid -- -- -- (412,700) -- (412,700)
------ ------ ----------- ---------- ------------- -----------
BALANCE, SEPTEMBER 30, 2001 1 $ 1 $ 1,532,435 $1,296,128 $ (3,423) $ 2,825,141
====== ====== =========== ========== ============= ===========
</Table>
See notes to condensed consolidated financial statements.
4
PDV AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
<Table>
<Caption>
NINE MONTHS
ENDED SEPTEMBER 30,
2001 2000
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES $ 485,741 $ 588,340
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (144,175) (87,949)
Proceeds from sales of property, plant and equipment 1,656 4,208
Proceeds from maturity of mirror notes -- 250,000
Decrease in restricted cash -- 3,015
Investments in LYONDELL-CITGO Refining LP (19,900) (10,700)
Loans to LYONDELL-CITGO Refining LP -- (7,024)
Investments in and advances to other affiliates (304) (15,500)
---------- ----------
Net cash (used in) provided by investing activities (162,723) 136,050
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (repayments of) short-term bank loans 26,500 (16,000)
Net proceeds from (repayments of) revolving bank loans 103,350 (462,000)
Proceeds from issuance of tax-exempt bonds 25,000 --
Payments on taxable bonds (25,000) --
Payments on senior notes -- (250,000)
Payments of capital lease obligations (17,276) (7,954)
Repayments of other debt (13,196) (5,334)
Dividends paid (412,700) (1,000)
---------- ----------
Net cash used in financing activities (313,322) (742,288)
---------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 9,696 (17,898)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 20,751 113,414
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 30,447 $ 95,516
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest, net of amounts capitalized $ 95,983 $ 123,106
========== ==========
Income taxes, net of refund of $15,008 in 2000 $ 186,141 $ 28,971
========== ==========
</Table>
See notes to condensed consolidated financial statements.
5
PDV AMERICA, INC. AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2001 AND 2000
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The financial information for PDV America, Inc. ("PDV America") subsequent
to December 31, 2000 and with respect to the interim three-month and
nine-month periods ended September 30, 2001 and 2000 is unaudited. In the
opinion of PDV America's 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 and nine-month periods ended September 30,
2001 and 2000 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, 2000 on Form 10-K, dated March 30,
2001, for additional information.
The condensed consolidated financial statements include the accounts of
PDV America and its wholly owned subsidiaries, CITGO Petroleum Corporation
("CITGO"), VPHI Midwest, Inc. ("Midwest") and PDV USA, Inc. ("PDV USA"),
as well as CITGO's 65%-owned subsidiary, Cit-Con Oil Corporation and
Midwest's wholly owned subsidiary, PDV Midwest Refining, L.L.C. ("PDVMR").
Each of these subsidiaries, together with PDV America, are herein referred
to collectively as, the "Companies."
2. CHANGE IN ACCOUNTING PRINCIPLE
On January 1, 2001 the Companies adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"). The statement, as amended, establishes
accounting and reporting standards for derivative instruments and for
hedging activities. It requires that an entity recognize all derivatives,
at fair value, as either assets or liabilities in the statement of
financial position with an offset either to shareholder's equity and
comprehensive income or income depending upon the classification of the
derivative. Certain of the derivative instruments identified at January 1,
2001, under the provisions of SFAS No. 133 had been previously designated
in hedging relationships that addressed the variable cash flow exposure of
forecasted transactions. Under the transition provisions of SFAS No. 133,
on January 1, 2001 the Companies recorded an after-tax,
cumulative-effect-type transition charge of $1.5 million to accumulated
other comprehensive income related to these derivatives. Certain of the
derivative instruments identified at January 1, 2001, under the provisions
of SFAS No. 133 had been previously designated in hedging relationships
that addressed the fair value of certain forward purchase and sale
commitments. Under the transition provisions of SFAS No. 133, on January
1, 2001 the Companies recorded fair value adjustments to the subject
derivatives and related commitments resulting in the recording of a net
after-tax, cumulative-effect-type transition charge of $0.2 million to net
income. The remaining derivatives identified at January 1, 2001 under the
provisions of SFAS No. 133, consisting of certain forward purchases and
sales, had not previously been considered derivatives under accounting
principles generally accepted in the United States of America. Under the
transition provisions of SFAS No. 133, on January 1, 2001 the Companies
recorded an after-tax, cumulative-effect-type transition benefit of $13.8
million to net income related to these derivatives.
The Companies did not elect subsequent hedge accounting for derivatives
existing at January 1, 2001. Accordingly, all changes in the fair value of
those derivatives have been recorded in income. Prospectively, the
Companies plan to elect hedge accounting only under limited circumstances
6
involving derivatives with initial terms of 90 days or greater and
notional amounts of $25 million or greater.
3. INVENTORIES
Inventories, primarily at LIFO, consist of the following:
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2001 2000
(UNAUDITED)
------------- ------------
(000'S OMITTED)
Refined products $ 884,080 $ 809,953
Crude oil 213,159 269,831
Materials and supplies 79,098 76,281
------------- ------------
$ 1,176,337 $ 1,156,065
============= ============
</Table>
4. LONG-TERM DEBT AND FINANCING ARRANGEMENTS
<Table>
<Caption>
SEPTEMBER 30, DECEMBER 31,
2001 2000
(UNAUDITED)
------------- ------------
(000'S OMITTED)
Revolving bank loans $ 103,350 $ --
Senior Notes, $200 million face amount, due 2006 with
interest rate of 7.875% 199,860 199,837
Senior Notes, $500 million face amount, due 2003 with
interest rate of 7.875% 498,987 498,614
Private Placement Senior Notes, due 2001 to 2006 with
interest rates from 9.03% to 9.30% 96,753 96,753
Master Shelf Agreement Senior Notes, due 2002 to
2009 with interest rates from 7.17% to 8.94% 260,000 260,000
Tax Exempt Bonds, due 2004 to 2031 with variable
and fixed interest rates 354,370 329,370
Taxable Bonds, due 2026 to 2028 with variable interest rates 149,000 174,000
Cit-Con bank credit agreement 1,786 7,143
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1,664,106 1,565,717
Current portion of long-term debt (85,071) (47,078)
------------- ------------
$ 1,579,035 $ 1,518,639
============= ============
</Table>
7
On May 11, 2001, CITGO renewed its $150 million 364-day revolving bank
loan facility for another term.
On May 28, 2001, CITGO established an additional $25 million 364-day
revolving bank loan facility.
5. INVESTMENT IN LYONDELL-CITGO REFINING LP
LYONDELL-CITGO Refining LP ("LYONDELL-CITGO") owns and operates a 265 MBPD
refinery in Houston, Texas and is owned by subsidiaries of CITGO (41.25%)
and Lyondell Chemical Company (58.75%) ("the Owners"). This refinery
processes heavy crude oil supplied by Petroleos de Venezuela, S.A.
("PDVSA" which may also be used to refer to one or more of its
subsidiaries) under a long-term supply contract that expires in 2017.
CITGO purchases substantially all of the gasoline, diesel and jet fuel
produced at the refinery under a long-term contract.
On February 9, 2001, PDVSA notified LYONDELL-CITGO that effective February
1, 2001, it had declared force majeure under the contract described above.
Under a force majeure declaration, PDVSA may reduce the amount of crude
oil that it would otherwise be required to supply under this agreement. If
PDVSA reduces its delivery of crude oil, LYONDELL-CITGO may be required to
use alternative sources to obtain its required supply of crude oil, which
may result in reduced operating margins. As of September 30, 2001, PDVSA
deliveries of crude oil to LYONDELL-CITGO have not been reduced due to
PDVSA's declaration of force majeure. It is not possible for PDV America
to forecast future financial impacts of this force majeure condition on
LYONDELL-CITGO's costs or the duration of the force majeure.
CITGO has notes receivable from LYONDELL-CITGO which total $35 million at
September 30, 2001 and December 31, 2000. The notes bear interest at
market rates and are due July 1, 2003. These notes are included in other
assets in the accompanying consolidated balance sheets.
CITGO accounts for its investment in LYONDELL-CITGO using the equity
method of accounting and records its share of the net earnings of
LYONDELL-CITGO based on allocations of income agreed to by the Owners.
Information on CITGO's investment in LYONDELL-CITGO follows:
8
<Table>
<Caption>
September 30, December 31,
2001 2000
------------- ------------
(Unaudited)
(000s omitted)
Carrying value of investment $ 515,147 $ 518,333
Notes receivable 35,278 35,278
Participation interest 41% 41%
Summary of financial position:
Current assets $ 292,000 $ 310,000
Non current assets 1,381,000 1,386,000
Current liabilities 436,000 867,000
Non current liabilities 776,000 321,000
Member's equity 461,000 508,000
</Table>
<Table>
<Caption>
Nine Months Ended September 30,
---------------------------------
2001 2000
------------ -----------
(Unaudited)
Equity in net income (loss) $ 69,597 $ 18,483
Cash distribution received 92,683 39,874
Summary of operating results:
Revenue $ 2,691,753 $ 2,936,815
Gross profit 273,484 155,266
Net income (loss) 185,822 66,104
</Table>
On July 20, 2001, LYONDELL-CITGO completed a refinancing of its working
capital revolver and its $450 million term bank loan which were scheduled
to mature on September 14, 2001. The new 18-month term loan and working
capital revolver will mature in January 2003.
9
6. 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 record accruals for potential losses when, in management's
opinion, such losses are probable and reasonably estimable. If known
lawsuits and claims were to be determined in a manner adverse to the
Companies, and in amounts greater than the Companies' accruals, then such
determinations could have a material adverse effect on the Companies'
results of operations in a given reporting period. However, in
management's opinion the ultimate resolution of these lawsuits and claims
will not exceed, by a material amount, the amount of the accruals and the
insurance coverage available to the Companies. This opinion is based upon
the current assessment of the Companies' management and counsel of these
lawsuits and claims. The most significant lawsuits and claims are
discussed below.
Four former marketers of The UNO-VEN Company ("UNO-VEN") have filed a
class action complaint against UNO-VEN alleging improper termination of
the UNO-VEN Marketer Sales Agreement under the Petroleum Marketing
Practices Act in connection with PDVMR's 1997 acquisition of Unocal's
interest in UNO-VEN. This class action has been certified for liability
purposes. The lawsuit is pending in the U.S. District Court in Wisconsin.
PDVMR has filed a motion for summary judgment. The Companies, including
PDVMR, jointly and severally, have agreed to indemnify UNO-VEN and certain
other related entities against certain liabilities and claims, including
this matter.
A lawsuit is pending against PDVMR and CITGO in the Illinois state court
which claims damages as a result of PDVMR's invoicing a partnership, in
which it is a partner, and an affiliate of the other partner of the
partnership, alleging excessive charges for electricity used by these
entities' facilities located adjacent to the Lemont, Illinois refinery.
The Companies have denied all allegations and are pursuing their defenses.
In May 1997, a fire occurred at CITGO's Corpus Christi refinery. No
serious personal injuries were reported. There are seventeen related
lawsuits pending in Corpus Christi, Texas state court against CITGO on
behalf of approximately 9,000 individuals alleging property damages,
personal injury and punitive damages. None of these are presently
scheduled for trial. Approximately 1,300 claims have been resolved for
immaterial amounts.
A class action lawsuit is pending in Corpus Christi, Texas state court
against CITGO which claims damages for reduced value of residential
properties as a result of alleged air, soil and groundwater contamination.
CITGO has purchased 275 adjacent properties included in the lawsuit and
settled those related property damage claims. Over CITGO's objections, the
trial court has recently ruled that an agreement, by CITGO that purported
to provide for settlement of the remaining property damage claims for $5
million payable by it, is enforceable. CITGO will appeal this decision.
A lawsuit alleging wrongful death and personal injury filed in 1996
against CITGO and other industrial facilities in Corpus Christi, Texas
state court was brought by persons who claim that exposure to refinery
hydrocarbon emissions have caused various forms of illness. The lawsuit is
scheduled for trial in 2002.
Litigation is pending in federal court in Lake Charles, Louisiana against
CITGO by a number of current and former refinery employees and applicants
asserting claims of racial discrimination in connection with CITGO's
employment practices. A trial involving two plaintiffs resulted in
verdicts for CITGO. The Court granted CITGO summary judgment with respect
to another group
10
of claims; these rulings have been affirmed by the Fifth Circuit Court of
Appeals. Trials of the remaining cases will be set in the future.
CITGO is among defendants to class action and individual lawsuits in North
Carolina, New York and Illinois alleging contamination of water supplies
by methyl tertiary butyl ether ("MTBE"), a component of gasoline. These
actions allege that MTBE poses public health risks and seek testing,
damages and remediation of the alleged contamination. These matters are in
early stages of discovery. One of the Illinois cases has been transferred
to New York and consolidated with the case pending in New York. CITGO has
denied all of the allegations and is pursuing its defenses.
In 1999, a group of U.S. independent oil producers filed petitions under
the U.S. antidumping and countervailing duty laws against imports of crude
oil from Venezuela, Iraq, Mexico and Saudi Arabia. These laws provide for
the imposition of additional duties on imports of merchandise if (1) the
U.S. Department of Commerce ("DOC"), after investigation, determines that
the merchandise has been sold to the United States at dumped prices or has
benefited from countervailing subsidies, and (2) the U.S. International
Trade Commission determines that the imported merchandise has caused or
threatened material injury to the U.S. industry producing like product.
The amount of the additional duties imposed is generally equal to the
amount of the dumping margin and subsidies found on the imports on which
the duties are assessed. No duties are owed on imports made prior to the
formal initiation of an investigation by the DOC. In 1999, prior to
initiation of a formal investigation, the DOC dismissed the petitions. In
2000, the U.S. Court of International Trade ("CIT") reversed this decision
and remanded the case to the DOC for reconsideration. In August 2001, the
DOC again dismissed the petitions. This matter is now pending before the
CIT for a decision to affirm or remand for further consideration.
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. Maintaining compliance with environmental
laws and regulations in the future could require significant capital
expenditures and additional operating costs.
PDV America's accounting policy establishes environmental reserves as
probable site restoration and remediation obligations become reasonably
capable of estimation. Based on currently available information, including
the continuing participation of former owners in remediation actions and
indemnification agreements with third parties, PDV America believes that
its accruals are sufficient to address its environmental cleanup
obligations.
In 1992, an agreement was reached between CITGO and a former owner
concerning a number of environmental issues which provides in part that
the former owner will continue to share the costs of certain specific
environmental remediation and certain tort liability actions based on
ownership periods and specific terms of the agreement.
In 1992, CITGO reached an agreement with a state agency to cease usage of
certain surface impoundments at the CITGO's Lake Charles refinery by 1994.
A mutually acceptable closure plan was filed with the state in 1993. CITGO
and its former owner are participating in the closure and sharing the
related costs based on estimated contributions of waste and ownership
periods. The remediation commenced in December 1993. In 1997, CITGO
presented a proposal to a state agency revising the 1993 closure plan. In
1998 and 2000, CITGO submitted further revisions as requested by the state
agency. Closure activities have been suspended pending a ruling by the
state agency on the proposal as amended.
11
The Texas Natural Resources Conservation Commission ("TNRCC") conducted
environmental compliance reviews at the Corpus Christi refinery in 1998
and 1999. TNRCC has issued Notices of Violation ("NOV") related to each of
the reviews and has proposed fines of approximately $970,000 based on the
1998 review and $700,000 based on the 1999 review. The first NOV was
issued in January 1999 and the second NOV was issued in December 1999.
Most of the alleged violations refer to recordkeeping and reporting
issues, failure to meet required emission levels, and failure to properly
monitor emissions. A hearing on the merits has been scheduled for November
2001. CITGO intends to vigorously contest the alleged violations and
proposed fines.
In June 1999, CITGO and numerous other industrial companies received
notice from the U.S. Environmental Protection Agency, ("EPA") that the EPA
believes these companies have contributed to contamination in the
Calcasieu Estuary, in the proximity of Lake Charles, Calcasieu Parish,
Louisiana and are Potentially Responsible Parties ("PRPs") under the
Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA"). The EPA made a demand for payment of its past investigation
costs from CITGO and other PRPs and is conducting a Remedial
Investigation/Feasibility Study ("RI/FS") under its CERCLA authority.
CITGO and other PRPs may be potentially responsible for the costs of the
RI/FS. CITGO disagrees with the EPA's allegations and intends to contest
this matter.
In June 1999, a NOV was issued by the EPA alleging violations of the
National Emission Standards for Hazardous Air Pollutants ("NESHAPS")
regulations covering benzene emissions from wastewater treatment
operations at the PDVMR Lemont, Illinois refinery operated by CITGO. CITGO
is in settlement discussions with the EPA. At this time, the likelihood of
an unfavorable outcome and the amount or range of any potential loss
cannot reasonably be estimated.
In October 1999, the Louisiana Department of Environmental Quality
("LDEQ") issued CITGO a NOV and Potential Penalty alleging violation of
NESHAPS regulations covering benzene emissions from wastewater treatment
operations at CITGO's Lake Charles, Louisiana refinery and requested
additional information. CITGO is in settlement discussions with the LDEQ
and anticipates resolving this matter by the end of the year for an
immaterial amount.
In November 1999, the Attorney General's Office of Illinois filed a
complaint in the 12th Judicial Circuit Court, Will County, Illinois
against PDVMR and CITGO alleging damages from several releases to the air
of contaminants from PDVMR's refinery. The initial complaint alleged
violations and potential compliance action. The Attorney General's office
later made a demand for penalties of approximately $150,000. A settlement
was reached in October 2001 which calls for CITGO to pay $120,000 in civil
penalties and requires several corrective actions at the refinery.
In January 2001, CITGO received two NOVs from the EPA alleging violations
of the Federal Clean Air Act ("CAA"). In July 2001, CITGO received an
additional NOV from the EPA alleging violations of the CAA at the PDVMR
Lemont, Illinois refinery. The NOVs are an outgrowth of inspections and
formal Information Requests regarding CITGO's and PDVMR's compliance with
the CAA. The NOVs cover CITGO's Lake Charles, Louisiana and Corpus
Christi, Texas refineries and the PDVMR Lemont, Illinois refinery operated
by CITGO. For the Lake Charles and Lemont facilities, the NOVs allege,
among other things, violations of the "New Source Review" ("NSR")
provisions of the CAA, which address installation and permitting of new
and modified air emission sources. For the Corpus Christi facility, the
NOV alleges violations of various monitoring, leak detection and repair
requirements of the CAA. If the Companies were to be found to have
violated the provisions cited in the NOVs, they would be subject to
penalties and significant capital expenditures for installation or
upgrading of pollution control equipment or technologies. The
12
likelihood of an unfavorable outcome and the amount or range of any
potential loss cannot reasonably be estimated at this time.
Conditions which require additional expenditures may exist with respect to
various sites of the Companies including, but not limited to, the
Companies' operating refinery complexes, closed refineries, service
stations and crude oil and petroleum product storage terminals. The amount
of such future expenditures, if any, is indeterminable.
DERIVATIVE COMMODITY AND FINANCIAL INSTRUMENTS - The Companies enter into
petroleum futures contracts, options and other over-the-counter commodity
derivatives, primarily to reduce their inventory purchase and product sale
exposure to market risk. In the normal course of business, the Companies
also enter into certain petroleum commodity forward purchase and sale
contracts which qualify as derivatives. At September 30, 2001, the balance
sheet caption other current liabilities includes a net unrealized loss of
$13 million related to the fair values of open commodity derivatives.
CITGO has also entered into various interest rate swaps to manage its risk
related to interest rate changes on its debt. The fair value of the
interest rate swap agreements in place at September 30, 2001, based on the
estimated amount that CITGO would receive or pay to terminate the
agreements as of that date and taking into account current interest rates,
was a loss of $3 million, the offset of which is recorded in the balance
sheet caption other current liabilities. In connection with the
determination of fair market value, CITGO considers the creditworthiness
of the counterparties, but no adjustment was determined to be necessary as
a result.
7. RELATED PARTY TRANSACTIONS
CITGO's largest supplier of crude oil is PDVSA. CITGO has entered into
long-term crude oil supply agreements with PDVSA with respect to the crude
oil requirements for each of CITGO's refineries. These crude oil supply
agreements contain force majeure provisions which entitle PDVSA to reduce
the quantity of crude oil and feedstocks delivered under the crude oil
supply agreements under specified circumstances. On February 9, 2001,
PDVSA notified CITGO that it had declared force majeure, effective
February 1, 2001, under each of the long-term crude oil supply agreements
it has with CITGO. Under a force majeure declaration, PDVSA may reduce the
amount of crude oil that it would otherwise be required to supply under
these agreements. If PDVSA reduces its delivery of crude oil, CITGO may be
required to use alternative sources to obtain its required supply of crude
oil, which may result in reduced operating margins.
As of September 30, 2001, PDVSA's deliveries of crude oil to CITGO have
not been reduced due to PDVSA's declaration of force majeure. It is not
possible for CITGO to forecast future financial impacts of this force
majeure condition on CITGO's costs or the duration of the force majeure.
8. OTHER INFORMATION
On August 14, 2001, a fire occurred at the crude oil distillation unit of
the Lemont refinery. The crude unit was destroyed and the refinery's other
processing units were temporarily taken out of production. A new crude
unit is expected to be operational in March or April 2002. Operations have
resumed by using purchased feedstocks for processing units downstream from
the crude unit. PDVMR has insurance coverage for this type of an event and
has submitted a notice of loss to its insurance carriers related to the
fire, including a claim under its business interruption coverage.
13
As a result of this fire, during the quarter ended September 30, 2001,
PDVMR recorded property losses and related expenses totaling $39.9 million
in Other income (expense)-net. The Companies record estimated property
damage insurance recoveries, up to the amount of recorded losses and
related expenses, when the collection of such amounts is probable.
Property damage insurance recoveries in excess of the amount of recorded
losses and related expenses, and business interruption insurance
recoveries are not recognized until such amounts are realized. For the
quarter ended September 30, 2001, Other income (expense)-net includes
$31.2 million related to insurance recoveries; such amount is included in
Accounts receivable at September 30, 2001.
On September 21, 2001, a fire occurred at the hydrocracker unit of the
Lake Charles refinery. The hydrocracker unit was damaged and operations at
other processing units were temporarily affected. Operation of the other
refinery units returned to normal on October 16, 2001. Operations at the
hydrocracker are anticipated to resume by mid-November 2001. CITGO has
insurance coverage for this type of an event and has submitted a notice of
loss to its insurance carriers related to the fire, including a claim
under its business interruption coverage.
As a result of this fire, during the quarter ended September 30, 2001,
CITGO recorded property losses and related expenses totaling $8 million in
Other income (expense), net. Since recorded losses and related expenses do
not exceed policy deductibles, no insurance recoveries related to this
incident were recorded during the quarter ended September 30, 2001.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The following discussion of the financial condition and results of
operations of PDV America should be read in conjunction with the unaudited
condensed consolidated financial statements of PDV America included elsewhere
herein. Reference is made to PDV America's Annual Report for the fiscal year
ended December 31, 2000 on Form 10-K, dated March 30, 2001, for additional
information and a description of factors which may cause substantial
fluctuations in the earnings and cash flows of PDV America.
In the quarter ended September 30, 2001, PDV America generated net
income of $76.2 million on revenue of $5.2 billion compared to net income of
$121.2 million on revenue of $5.9 billion for the same period last year. In the
nine months ended September 30, 2001, PDV America generated net income of $449.7
million on revenue of $16.0 billion compared to net income of $244.6 million on
revenue of $16.5 billion for the same period last year. (See "Gross margin").
CITGO's revenue accounted for over 99% of PDV America's consolidated
revenues for the three and nine month periods ended September 30, 2001 and 2000.
PDVMR's sales of $1.3 billion for the nine-month period ended September 30, 2001
were primarily to CITGO and, accordingly, these were eliminated in
consolidation.
LYONDELL-CITGO owns and operates a refinery in Houston, Texas that
processes heavy crude oil supplied by PDVSA under a long-term supply contract
that expires in 2017. CITGO purchases substantially all of the gasoline, diesel
and jet fuel produced at the refinery under a long-term contract.
On February 9, 2001, PDVSA notified LYONDELL-CITGO that effective
February 1, 2001, it had declared force majeure under the contract described
above. Under a force majeure declaration, PDVSA may reduce the amount of crude
oil that it would otherwise be required to supply under this agreement. If PDVSA
reduces its delivery of crude oil, LYONDELL-CITGO may be required to use
alternative sources to obtain its required supply of crude oil, which may result
in reduced operating margins. As of September 30, 2001, PDVSA deliveries of
crude oil to LYONDELL-CITGO have not been reduced due to PDVSA's declaration of
force majeure. It is not possible for PDV America to forecast future financial
impacts of this force majeure condition on LYONDELL-CITGO's costs or the
duration of the force majeure.
CITGO's largest supplier of crude oil is PDVSA. CITGO has entered into
long-term crude oil supply agreements with PDVSA with respect to the crude oil
requirements for each of CITGO's refineries. These crude oil supply agreements
contain force majeure provisions which entitle PDVSA to reduce the quantity of
crude oil and feedstocks delivered under the crude oil supply agreements under
specified circumstances. On February 9, 2001, PDVSA notified CITGO that it had
declared force majeure, effective February 1, 2001, under each of the long-term
crude oil supply agreements it has with CITGO. Under a force majeure
declaration, PDVSA may reduce the amount of crude oil that it would otherwise be
required to supply under these agreements. If PDVSA reduces its delivery of
crude oil, CITGO may be required to use alternative sources to obtain their
required supply of crude oil, which may result in reduced operating margins.
As of September 30, 2001, PDVSA's deliveries of crude oil to CITGO have
not been reduced due to PDVSA's declaration of force majeure. It is not possible
for CITGO to forecast future financial impacts of this force majeure condition
on CITGO's costs or the duration of the force majeure.
15
RESULTS OF OPERATIONS
The following table summarizes the sources of PDV America's sales
revenues and sales volumes for the three-month and nine-month periods ended
September 30, 2001 and 2000:
PDV AMERICA SALES REVENUES AND VOLUMES
<Table>
<Caption>
THREE NINE THREE NINE
MONTHS ENDED MONTHS ENDED MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
------------------- ------------------- ------------------- -------------------
2001 2000 2001 2000 2001 2000 2001 2000
-------- -------- -------- -------- -------- -------- -------- --------
($ in millions) ($ in millions) (MM gallons) (MM gallons)
Gasoline $ 3,069 $ 3,364 $ 9,282 $ 9,460 3,717 3,559 10,239 10,350
Jet fuel 426 523 1,364 1,457 556 576 1,693 1,758
Diesel/#2 fuel 999 1,168 3,192 3,292 1,353 1,310 4,074 4,028
Asphalt 192 201 378 414 365 293 710 614
Petrochemicals and industrial products 308 472 1,173 1,324 501 547 1,641 1,654
Lubricants and waxes 156 139 451 411 74 66 216 208
-------- -------- -------- -------- -------- -------- -------- --------
Total refined product sales 5,150 5,867 15,840 16,358 6,566 6,351 18,573 18,612
Other sales and adjustments 18 16 46 42
-------- -------- -------- -------- -------- -------- -------- --------
Total sales $ 5,168 $ 5,883 $ 15,886 $ 16,400 6,566 6,351 18,573 18,612
======== ======== ======== ======== ======== ======== ======== ========
</Table>
16
The following table summarizes PDV America's cost of sales and
operating expenses for the three-month and nine-month periods ended September
30, 2001 and 2000:
PDV AMERICA COST OF SALES AND OPERATING EXPENSES
<Table>
<Caption>
THREE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
2001 2000 2001 2000
-------- -------- -------- --------
($ in millions) ($ in millions)
Crude oil $ 1,257 $ 1,857 $ 4,038 $ 5,024
Refined products 2,767 2,991 8,292 8,431
Intermediate feedstocks 400 391 1,157 1,140
Refining and manufacturing costs 269 263 851 781
Other operating costs, expenses and inventory changes 293 144 713 448
-------- -------- -------- --------
Total cost of sales and operating expenses $ 4,986 $ 5,646 $ 15,051 $ 15,824
======== ======== ======== ========
</Table>
Sales revenues and volumes. Sales decreased $715 million, or
approximately 12%, in the three-month period ended September 30, 2001 as
compared to the same period in 2000. This was due to a decrease in average sales
price of 15% partially offset by an increase in sales volume of 3%. Sales
decreased $514 million, or approximately 3%, in the nine-month period ended
September 30, 2001 as compared to the same period in 2000. This was due to a
decrease in average sales price of 3% and a decrease in sales volume of less
than 1%. (See PDV America Sales Revenues and Volumes table above.)
Equity in earnings of affiliates. Equity in earnings of affiliates
increased by $9 million for the three-month period ended September 30, 2001 and
increased $66 million for the nine-month period ended September 30, 2001 as
compared to the same periods in 2000. The increase was primarily due to the
increase in the earnings of LYONDELL-CITGO. CITGO's share of these earnings
increased $6 million, from $24 million in the third quarter of 2000 to $30
million in the third quarter of 2001 and $52 million, from $18 million in the
first nine months of 2000 to $70 million in the first nine months of 2001.
LYONDELL-CITGO's increased earnings in 2001 are primarily due to higher refining
margins on a year-to-date basis, offset by the impact of higher natural gas
prices and lower crude processing rates during the first quarter due to an
unplanned production unit outage at the refinery. The earnings of the first nine
months of 2000 were impacted by a major planned turnaround which occurred during
the second quarter of 2000.
Other income (expense). Other income (expense) was $(17) million for
the quarter ended September 30, 2001 as compared to $(6) million for the same
period in 2000. Other income (expense) was $(15) million for the nine months
ended September 30, 2001 as compared to $(11) million for the same period in
2000. The 2001 amounts include property losses and related expenses totaling $17
million, which is net of insurance recoveries of $31.2 million, that resulted
from the crude oil distillation unit fire at the Lemont refinery in August 2001
and the hydrocracker unit fire at the Lake Charles refinery in September 2001.
(See Note 8 to the condensed consolidated financial statements included
elsewhere herein.)
Cost of sales and operating expenses. Cost of sales and operating
expenses decreased by $660 million or 12%, in the quarter ended September 30,
2001 as compared to the same period in 2000. Cost of sales and operating
expenses decreased by $773 million or 5%, in the nine months ended September 30,
17
2001 as compared to the same period in 2000. (See PDV America Cost of Sales and
Operating Expenses table above.)
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 53% of total cost of sales and
operating expenses for the third quarter of 2001 and 2000, respectively, and 55%
and 53% for the first nine months of 2001 and 2000, respectively. The Companies
estimate that margins on purchased products, on average, are 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 not practical to measure the effects on
profitability of changes in volumes of purchased products. 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 anticipated purchased product requirements; however, there could be
events beyond the control of the Companies which impact the volume of refined
products purchased. (See also "Factors Affecting Forward Looking Statements".)
Gross margin. The gross margin for the three-month period ended
September 30, 2001 was approximately 2.8 cents per gallon, compared to
approximately 3.7 cents per gallon for the same period in 2000. The gross margin
for the nine-month period ended September 30, 2001 was approximately 4.5 cents
per gallon, compared to approximately 3.1 cents per gallon for the same period
in 2000. In the three-month period ended September 30, 2001, both the revenue
per gallon component and the cost per gallon component decreased approximately
15%. As a result, the gross margin decreased approximately nine-tenths of one
cent on a per gallon basis in the quarter ended September 30, 2001 compared to
the same period in 2000. In the nine-month period ended September 30, 2001, the
revenue per gallon component decreased approximately 3% while the cost per
gallon component decreased approximately 5%. As a result, the gross margin
increased approximately one and four-tenths cents on a per gallon basis in the
nine months ended September 30, 2001 compared to the same period in 2000. These
results reflect reduced industry wide refining and marketing margins during the
third quarter, while on a year to date basis industry margins are improved over
last year. The reduced margins coupled with lower refinery throughput during the
third quarter 2001, due to a fire at the Lemont refinery and a fire at the Lake
Charles refinery, contributed to the Companies' lower gross margins reported
during the third quarter.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased from $59 million in the third quarter of 2000
to $67 million in the third quarter of 2001, or 14%. Selling, general and
administrative expenses increased from $161 million in the first nine months of
2000 to $190 million in the same period in 2001, or 18%. The difference is
principally due to an increase in incentive compensation and the start-up
expenses related to an international operation in 2001.
Interest Expense. Interest expense decreased by $6 million in the
three-month period and $25 million in the nine-month period ended September 30,
2001 as compared to the same periods in 2000. This was primarily due to the
decrease in key interest rates during the third quarter; the lower average
amount outstanding under the revolving and short-term borrowing facilities
during the majority of the first nine months of 2001 which was made possible by
cash flows from operating activities; and a $250 million senior note principal
payment in August 2000.
LIQUIDITY AND CAPITAL RESOURCES
For the nine-month period ended September 30, 2001, the Companies'
consolidated net cash provided by operating activities totaled approximately
$486 million. Operating cash flows were derived from net income of $450 million,
depreciation and amortization of $219 million and changes in working capital and
other adjustments of $(183) million. The more significant changes in working
capital included
18
the decrease in accounts receivable, including receivables from affiliates, of
approximately $172 million and the decrease in accounts payable and other
current liabilities, including payables to affiliates, of approximately $441
million.
Net cash used in investing activities totaled $163 million for the
nine-month period ended September 30, 2001 consisting primarily of capital
expenditures of $144 million (compared to $88 million for the same period in
2000).
Net cash used in financing activities totaled $313 million for the
nine-month period ended September 30, 2001 consisting primarily of $413 million
of dividends paid to parent and the payment of capital lease obligations of $17
million, offset by $103 million net proceeds from revolving bank loans and $27
million net proceeds on short-term borrowings.
On May 28, 2001, CITGO established an additional $25 million 364-day
revolving bank loan facility.
On May 11, 2001, CITGO renewed its $150 million 364-day revolving bank
loan facility for another term.
As of September 30, 2001, capital resources available to the Companies
included cash generated by operations, available borrowing capacity under
CITGO's committed bank facilities of $472 million and $66 million of uncommitted
short-term borrowing facilities with various banks, and $75 million available
borrowing capacity under PDVMR's revolving credit 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. PDV America's management believes that
the Companies have sufficient capital resources to carry out planned capital
spending programs, including regulatory and environmental projects in the near
term, and to meet currently anticipated future obligations as they arise. 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 Companies' ability to obtain such financing will depend on
numerous factors, including market conditions and the perceived creditworthiness
of the Companies at that time.
In April 2000, CITGO amended an agreement to sell trade accounts
receivable on an ongoing basis and without recourse. The amendment increased the
amount of such receivables that can be sold to $225 million. The amended
agreement was extended in April 2001 for one year and is renewable for
successive annual terms by mutual agreement. In October 2001, CITGO's current
agreement to sell credit card receivables expired and CITGO chose not to renew
it.
The Companies are in compliance with their obligations under their debt
financing arrangements at September 30, 2001.
NEW ACCOUNTING STANDARDS
On January 1, 2001 the Companies adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"). The statement, as amended, establishes accounting
and reporting standards for derivative instruments and for hedging activities.
It requires that an entity recognize all derivatives, at fair value, as either
assets or liabilities in the statement of financial position with an offset
either to shareholder's equity and comprehensive income or income depending upon
the classification of the derivative. Certain of the derivative instruments
identified at January 1, 2001 under the provisions of SFAS No. 133 had been
previously
19
designated in hedging relationships that addressed the variable cash flow
exposure of forecasted transactions. Under the transition provisions of SFAS No.
133, on January 1, 2001 the Companies recorded an after-tax,
cumulative-effect-type transition charge of $1.5 million to accumulated other
comprehensive income related to these derivatives. Certain of the derivative
instruments identified at January 1, 2001, under the provisions of SFAS No. 133
had been previously designated in hedging relationships that addressed the fair
value of certain forward purchase and sale commitments. Under the transition
provisions of SFAS No. 133, on January 1, 2001 the Companies recorded fair value
adjustments to the subject derivatives and related commitments resulting in the
recording of a net after-tax, cumulative-effect-type transition charge of $0.2
million to net income. The remaining derivatives identified at January 1, 2001
under the provisions of SFAS No. 133, consisting of certain forward purchases
and sales, had not previously been considered derivatives under accounting
principles generally accepted in the United States of America. Under the
transition provisions of SFAS No. 133, on January 1, 2001 the Companies recorded
an after-tax, cumulative-effect-type transition benefit of $13.8 million to net
income related to these derivatives.
PDV America did not elect subsequent hedge accounting for derivatives
existing at January 1, 2001. Accordingly, all changes in the fair value of those
derivatives have been recorded in income. Prospectively, PDV America plans to
elect hedge accounting only under limited circumstances involving derivatives
with initial terms of 90 days or greater and notional amounts of $25 million or
greater.
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141, "Business Combinations"
("SFAS No. 141") which addresses financial accounting and reporting for business
combinations and requires that all business combinations initiated after June
30, 2001 be accounted for under the purchase method. Use of the pooling of
interests method is no longer permitted. The adoption of SFAS No. 141 will not
impact the Companies' financial position or results of operations.
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142") which is fully
effective in fiscal years beginning after December 15, 2001, although certain
provisions of SFAS No. 142 are applicable to goodwill and other intangible
assets acquired in transactions completed after June 30, 2001. SFAS No. 142
addresses financial accounting and reporting for acquired goodwill and other
intangible assets and requires that goodwill and intangibles with an indefinite
life no longer be amortized but instead be periodically reviewed for impairment.
The adoption of SFAS No. 142 will not materially impact the Companies' financial
position or results of operations.
In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 143, "Accounting for Asset Retirement Obligations" ("SFAS No. 143") which
addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. It applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and (or) the normal operation of a long-lived asset, except for certain
obligations of lessees. This statement is effective for financial statements
issued for fiscal years beginning after June 15, 2002. The Companies have not
determined the impact on their financial statements that may result from the
adoption of SFAS No. 143.
In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS No. 144") which addresses financial accounting and reporting for
the impairment or disposal of long-lived assets by requiring that one accounting
model be used for long-lived assets to be disposed of by sale, whether
previously held and used or newly acquired, and by broadening the presentation
of discontinued operations to include more disposal transactions. SFAS No. 144
is effective for financial statements issued for fiscal years
20
beginning after December 15, 2001, and interim periods within those fiscal
years. The provisions of this statement generally are to be applied
prospectively; therefore, the adoption of SFAS No. 144 will not impact the
Companies' financial position or results of operations.
PROPOSED ACCOUNTING CHANGE
The American Institute of Certified Public Accountants has issued a
"Statement of Position" exposure draft on cost capitalization that is expected
to require companies to expense the non-capital portion of major maintenance
costs as incurred. The statement is expected to require that any existing
deferred non-capital major maintenance costs be expensed immediately. This
statement also has provisions which will change the method of determining
depreciable lives. The impact on future depreciation expense is not determinable
at this time. The exposure draft indicates that this change will be required to
be adopted for fiscal years beginning after June 15, 2002, and that the effect
of expensing existing deferred major maintenance costs will be reported as a
cumulative effect of an accounting change in the consolidated statement of
income. At September 30, 2001, PDV America had included turnaround costs of $95
million in other assets. PDV America's management has not determined the amount,
if any, of these costs that could be capitalized under the provisions of the
exposure draft.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Introduction. The Companies have exposure to price fluctuations of
crude oil and refined products as well as fluctuations in interest rates. To
manage these exposures, management has defined certain benchmarks consistent
with its preferred risk profile for the environment in which the Companies
operate and finance their assets. The Companies do not attempt to manage the
price risk related to all of their inventories of crude oil and refined
products. As a result, at September 30, 2001, the Companies were exposed to the
risk of broad market price declines with respect to a substantial portion of
their crude oil and refined product inventories. The following disclosures do
not attempt to quantify the price risk associated with such commodity
inventories.
21
Commodity Instruments. The Companies balance their crude oil and
petroleum product supply/demand and manage a portion of their price risk by
entering into petroleum commodity derivatives.
NON TRADING COMMODITY DERIVATIVES
OPEN POSITIONS AT SEPTEMBER 30, 2001
<Table>
<Caption>
MATURITY CONTRACTED CONTRACT MARKET
COMMODITY DERIVATIVE DATE VOLUME VALUE VALUE
--------- ---------- ---- ---------- -------- --------
($ in millions)
--------------------
No Lead Gasoline (1) Futures Purchased 2001 740 $ 22.8 $ 20.0
Futures Sold 2001 880 $ 24.5 $ 23.8
Forward Purchase Contracts 2001 5,126 $ 149.4 $ 135.5
Forward Sale Contracts 2001 3,856 $ 111.6 $ 100.9
Distillates (1) Futures Purchased 2001 1,483 $ 45.6 $ 42.1
Futures Purchased 2002 1,184 $ 35.7 $ 33.0
Futures Purchased 2003 12 $ 0.3 $ 0.3
Futures Sold 2001 959 $ 30.5 $ 27.0
Futures Sold 2002 600 $ 18.7 $ 16.8
OTC Options Purchased 2001 10 $ -- $ --
OTC Options Sold 2001 10 $ -- $ --
OTC Options Purchased 2002 30 $ -- $ --
OTC Options Sold 2002 30 $ -- $ (0.1)
OTC Swaps (Pay Fixed/Receive Floating)(3) 2001 1 $ -- $ --
Forward Purchase Contracts 2001 1,298 $ 38.5 $ 38.0
Forward Sale Contracts 2001 1,321 $ 36.7 $ 36.3
Forward Sale Contracts 2002 25 $ 0.8 $ 0.7
Crude Oil (1) Futures Purchased 2001 1,512 $ 41.9 $ 35.5
Futures Purchased 2002 600 $ 15.8 $ 14.3
Futures Sold 2001 579 $ 15.7 $ 13.5
Listed Options Purchased 2001 694 $ -- $ 0.6
Listed Options Sold 2001 1,194 $ -- $ 0.4
Forward Purchase Contracts 2001 4,215 $ 114.1 $ 98.6
Forward Sale Contracts 2001 3,711 $ 100.5 $ 86.7
Natural Gas (2) Futures Sold 2001 30 $ 0.8 $ 0.8
Futures Sold 2002 20 $ 0.6 $ 0.6
OTC Options Purchased 2001 60 $ -- $ (0.1)
OTC Options Sold 2001 30 $ -- $ (0.5)
OTC Options Sold 2001 11 $ -- $ (0.1)
</Table>
- ----------
(1) Thousands of barrels
(2) Ten-thousands of mmbtu
(3) Floating price based on market index designated in contract; fixed price
agreed upon at date of contract.
22
NON TRADING COMMODITY DERIVATIVES
OPEN POSITIONS AT SEPTEMBER 30, 2000
<Table>
<Caption>
MATURITY NUMBER OF CONTRACT MARKET
COMMODITY DERIVATIVE DATE CONTRACTS VALUE(2) VALUE
--------- ---------- ---- --------- -------- --------
($ in millions)
--------------------
No Lead Gasoline (1) OTC Crack Swaps (Pay Floating/
Receive Fixed)(4) 2000 1200 $ 3.7 $ 2.5
OTC Crack Swaps (Pay Fixed/
Receive Floating)(4) 2000 1200 $ 2.7 $ 2.5
Heating Oil (1) Futures Purchased 2000 299 $ 10.6 $ 11.6
Futures Purchased 2001 702 $ 23.8 $ 25.8
Futures Purchased 2002 8 $ 0.3 $ 0.3
OTC Crack Swap Options Purchased 2000 100 $ -- $ --
OTC Crack Swap Options Sold 2000 100 $ -- $ (0.2)
OTC Swaps (Pay Floating/Receive Fixed)(4) 2000 100 $ 4.3 $ 3.9
OTC Swaps (Pay Fixed/Receive Floating)(4) 2000 9 $ 0.2 $ 0.3
OTC Swaps (Pay Fixed/Receive Floating)(4) 2001 9 $ 0.2 $ 0.3
OTC Crack Swaps (Pay Floating/
Receive Fixed)(4) 2000 3000 $ 21.6 $ 19.6
Natural Gas (3) Futures Purchased 2000 10 $ 0.5 $ 0.5
</Table>
- ----------
(1) 1000 barrels per contract
(2) Weighted average price
(3) 10,000 mmbtu per contract
(4) Floating price based on market index designated in contract; fixed price
agreed upon at date of contract.
23
Debt Related Instruments. CITGO has fixed and floating U.S. currency
denominated debt. CITGO uses interest rate swaps to manage its debt portfolio
toward a benchmark of 40 to 60 percent fixed rate debt to total fixed and
floating rate debt. These instruments have the effect of changing the interest
rate with the objective of minimizing CITGO's long-term costs. At September 30,
2001, CITGO's primary exposures were to LIBOR and floating rates on tax exempt
bonds.
For interest rate swaps, the table below presents notional amounts and
interest rates by expected (contractual) maturity dates. Notional amounts are
used to calculate the contractual payments to be exchanged under the contracts.
NON TRADING INTEREST RATE DERIVATIVES
OPEN POSITIONS AT SEPTEMBER 30, 2001 AND 2000
<Table>
<Caption>
NOTIONAL
EXPIRATION FIXED RATE PRINCIPAL
VARIABLE RATE INDEX DATE PAID AMOUNT
------------------- ---------- ---------- ---------
($ in millions)
J.J. Kenny February 2005 5.30% 12
J.J. Kenny February 2005 5.27% 15
J.J. Kenny February 2005 5.49% 15
----
$ 42
====
</Table>
The fair value of the interest rate swap agreements in place at
September 30, 2001, based on the estimated amount that CITGO would receive or
pay to terminate the agreements as of that date and taking into account current
interest rates, was a loss of $3 million.
24
For debt obligations, the table below presents principal cash flows and
related weighted average interest rates by expected maturity dates. Weighted
average variable rates are based on implied forward rates in the yield curve at
the reporting date.
DEBT OBLIGATIONS
At September 30, 2001
<Table>
<Caption>
EXPECTED
FIXED AVERAGE FIXED VARIABLE AVERAGE VARIABLE
Expected Maturities Rate Debt Interest Rate Rate Debt Interest Rate
------------------- --------- ------------- --------- -------------
($ in millions) ($ in millions)
2001 $ 40 9.11% $ 66 3.44%
2002 36 8.78% 18 3.81%
2003 560 7.98% 85 4.45%
2004 31 8.02% 16 5.14%
2005 11 9.30% -- --
Thereafter 380 7.99% 484 8.14%
------ ----- ---- -----
Total $1,058 8.07% $669 7.02%
====== ===== ==== =====
Fair Value $1,095 $669
====== ====
</Table>
DEBT OBLIGATIONS
At September 30, 2000
<Table>
<Caption>
EXPECTED
FIXED AVERAGE FIXED VARIABLE AVERAGE VARIABLE
Expected Maturities Rate Debt Interest Rate Rate Debt Interest Rate
------------------- --------- ------------- --------- -------------
($ in millions) ($ in millions)
2000 $ 40 9.11% $ 2 7.60%
2001 40 9.11% 7 7.49%
2002 36 8.78% -- --
2003 560 7.98% -- --
2004 31 8.02% 16 8.26%
Thereafter 391 8.02% 484 9.47%
------ ----- ---- -----
Total $1,098 8.10% $509 9.40%
====== ===== ==== =====
Fair Value $1,073 $509
====== ====
</Table>
25
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The required information is incorporated by reference into Part II of this
Report from Note 6 of the Notes to the Condensed Consolidated Financial
Statements included in Part I of this Report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K:
None.
26
SIGNATURES
Pursuant to the requirements of the Securities 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: November 14, 2001 /s/ Carlos Jorda
----------------------------------
Carlos Jorda
President and Chief Executive Officer
Date: November 14, 2001 /s/ Paul Largess
----------------------------------
Paul Largess
Chief Accounting Officer and Treasurer
27